How To Find A Trustworthy Mortgage Broker?

Referrals are still the primary method of getting introduced to a mortgage broker when buying a home or an investment property, however more and more Canadians are searching for mortgage brokers online.  Borrowing hundreds of thousands of dollars is a serious undertaking and requires due diligence.  Based on my years of experience here is a checklist of how to find a trustworthy mortgage broker.

Trustworthy Mortgage Broker Checklist

1. Online Presence: Everyone, well pretty much everyone, has a website nowadays. However, are they active in publishing material relevant to the market? Are they experts in a niche market (real estate investment, self employed, first time home buyers, bad credit, private mortgages....) or are they the jack of all trades?  Going through their website you will get a good feel if they are experts in a specific field.
2. Strategy vs No Strategy: Quoting rate requires no skills, afterall most brokers and lenders have the same rates with a possible difference of up to 0.1% ($100 for every $100,000 per year).  Unfortunately, obtaining a mortgage licence is easy; one course, a few hundred dollars and off you go!  If a broker or agent is only quoting rates without explaining the following, run away:
   • Pros and cons of each product
   • How each product helps you achieve your financial goals
   • Fine print terms (penalties, mortgage features)
   • A plan to pro-actively manage the mortgage post funding
3. Execution: A financial planner engages their clients on an ongoing basis to adjust their portfolios as economic conditions and clients' lifestyle change, why wouldn't you expect the same from your mortgage broker? Building net worth is achieved through 2 ways: 1/ increasing assets and 2/ decreasing bad debt.  How will the mortgage broker track your mortgage and keep you informed? Why not have a debt manager on your team?
4. Full Time vs Part Time: Since mortgage agents have a low barrier of entry, there are some out there who operate on a part time basis.  There is nothing wrong with someone building their business to transition full time into the profession, but would you trust a part time lawyer, a part time doctor, a part time real estate agent or a part time contractor?
5. Experience: I'm into sports, so I'll use a sports analogy: great coaches used to be players in the past.  If you are looking to invest in real estate, shouldn't you engage a mortgage broker who invests in real estate, whose been through the ups and downs? If you are self employed, shouldn't you approach a full time self employed mortgage broker who personally experienced the challenges of getting mortgage financing? If you are a first time buyer, shouldn't you meet with a mortgage broker who had a terrible experience getting a mortgage for their first home?
6. Job Interview: I view hiring a mortgage broker as applying for a job.  You probably can recall going for a job interview, where the interviewers asked lots of questions and based on your answers (and references) got a gut feel for you.  Hiring a mortgage broker is the same, use the above information to ask questions and get a good gut feel for who you should hire.  You are trusting a professional with hundreds of thousands of dollars.

If you are buying your first home, an investment property or you are self employed and looking to interview a professional mortgage broker, 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. 

Bad News If You Are A Real Estate Investor Or Self Employed

OSFI, Office of the Superintendent of Financial Institutions, which regulates the banking system in Canada is proposing to limit the home equity lines of credit (HELOCs) to 65% of home value from the current 80%.  This is a significant change for the following reasons:

• Real estate investors access their home equity to finance investment properties (downpayment for buying an investment property, renovating an investment property until the property is refinanced and emergency funds if required)
• Self employed Canadians access their home equity to fund business capital requirements, cash flow requirements, as well as safety net if urgent matters arise

Canadians have taken on significant amounts of debt over the last few years (debt to income ratio is at all time highs around 1.5:1 ratio), however the mortgage delinquency rate in Canada is less than 1%.  The new HELOC change will have a significant impact not only on self employed Canadians and real estate investors but also other Canadians who use their HELOCs to invest into the stock market to create a tax deductible loan and be tax efficient.

In my opinion, OSFI is overreacting by reducing HELOCs to 65%.  75% of home values would be a reasonable change. Afterall, Canada is known for moderate changes.  Time will tell if this move is a good one for the economy and protects the housing market from a real estate bubble.

To discuss how these changes will impact your mortgage financing needs and options to address your capital requirements, 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

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.

What's Happening To Variable Mortgages?

What Was That Lender's Name Again?

Mortgage brokers promote dealing with 20 or more lenders.  However, many homeowners only recognize the big 6 banks they have seen on street corners.  So who are these other lenders that brokers promote? In Canada, approximately 25% of homeowners use the services of a mortgage broker.  These lenders are Canadian owned and operated, but choose to fund their mortgages through the broker channel to cut overhead costs on "brick and mortar".  Afterall, having full-time salaried employees with benefits cost money, not to mention the costs of operating a bank branch.  Due to the reduction of expenses for the "non-bank" lenders, they tend to pass on the savings to borrowers through lower rates.

What are The Risks of Dealing With Non-Bank Lenders?

There is a mis-conception, especially after the financial credit crunch in late 2008, that borrowers will lose their homes if the mortgage is funded by a non-bank lender.  This is absolutely not true.  The risk is assumed by the lender since they are the ones giving out their money with the understanding the borrower will repay the mortgage on time.  Also, keep in mind these lenders function under the Canadian Government rules and laws.

Why Should I Choose a Non-Bank Lender Over A Bank?

You don't have to.  A non-bank lender is an option that is presented by your mortgage professional to consider.  Other important factors to consider when choosing a lender are:

• How is the mortgage penalty calculated?
• If I decide to lock in, do I get the posted or discounted rate (typically 1.5% difference)?
• What features are built into the mortgage (pre-payment, increased payment, portable, assumable...)?
• What are the fine print terms that I should be aware of?
• Who & how will my mortgage be managed? Afterall, getting a mortgage is one thing but working with someone who will oversee the mortgage and optimize it to reduce overall interest is another skill (click here for inflation hedge mortgage strategy)

Bottom line, if you pay your mortgage on time no on will take your home away!  This is Canada afterall.

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

Are Mortgage Interest Rates Dropping?

My Commentary On What The Bank Of Canada Said Today

What's Your Best Interest Rate?

Typically, one asks for the best mortgage rate when looking for a mortgage.  In this video, other questions to be considered are discussed to help one decide since a mortgage is an investment vehicle not a commodity.

Where Is Prime Rate Going?

Is That The Best Rate You Have?

In today's competitive mortgage market, there is lots of "lowest interest rate" and "best mortgage rates" advertising in the media. I even saw a jeweler offering mortgages!!  Is the best rate really what's best for one's situation?

Asking for and making a decision strictly on lowest rate is similar to someone walking into a financial planner's office and asking for the lowest MER mutual fund.  Mortgages are investments and need to be chosen based on where the economy is currently, what's expected to happen with interest rates over the next few years (inflation, job creation and global factors), personal and financial situation and borrower's risk tolerance. The fine print of the mortgage such as compounding, prepayment priviliges, increased payments, portability, assumability and how the penalty is calculated are important features to be understood upfront prior to commiting to a mortgage product.  It's unfortunate that homeonwers have been programmed to get the lowest rate, set the payment and not look at the mortgage till renewal time. There are significant opportunities in optimizing the mortgage to reduce the amortization and build significant equity in a shorter period of time if the mortgage is managed properly by a professional.

The next time you are in the market for a mortgage whether you are buying a home or an investment property, renewing, or refinancing, please email me to send you a checklist of factors to consider in choosing what's right for you and your family.

Please contact me should you have any questions regarding your mortgage.

What Drives Variable Rate Mortgages?

My previous blog post discussed factors driving fixed rate mortgages.  What about variable rate mortgages? Variable mortgages are driven by prime rate (which is based on Bank of Canada's benchmark rate) and the discount a lender would provide. For example, 5 year variable mortgage at prime less 0.75%.

The benchmark rate, is set by the Bank of Canada on eight set dates annually.  Bank of Canada targets inflation around the 2% level, if inflation is higher then the benchmark rate is increased to control inflation and in cases where there is low inflation (or deflation), the benchmark rate is lowered to stimulate consumer spending and business investments due to the low cost of borrowing.

What does the dollar have to do with prime rate?

Canada's benchmark rate cannot be at a much higher level than the US benchmark rate since a substantial difference between the two would drive foreign investors to buy the Canadian dollar and appreciate its value.  A stronger Canadian dollar would reduce Canada's competitiveness by making Canadian products more expensive therefore reducing exports and slowing economic growth.  The US economy has and will continue to experience tough and slow economic recovery. The US Federal Reserve will keep its benchmark rate low to stimulate the economy, create jobs, promote consumer spending and increase housing demand through low interest rate environment.  With the upcoming US elections in 2012, the US will keep rates low to aid re-electing the current president (historic data shows in re-election years US interest rates are kept low).  This low US interest rate environment will exert more pressure on the Bank of Canada not to increase the Canadian benchmark rate aggressively till the end of 2012 which makes variable interest rates favourable. Having said that, the Bank of Canada will have to increase the benchmark rate to control inflation and high consumer debt levels, however it will be gradual. My prediction is 0.5% increase for this year.

For your personal mortgage review, please contact me.

What Drives Fixed Rate Mortgages?

Since January of this year, fixed rate mortgages have been volatile (see chart below) with many increases followed by decreases whereas prime rate (which affects variable mortgages) has been stable over the same period of time. What drives fixed interest rates to be this volatile?

Fixed rates are driven by the bond market.  Bond yields decrease with bad news such as the recent Japanese natural disaster and the Libyan crisis. These events which occured in mid March resulted in lower fixed rates for a short period of time. On the other hand, news such as higher inflation and positive job creation drive up bond yields since investors move their money into the stock market and for bonds to be attractive for investors, they would have to provide a higher yield (ie. fixed rates would increase).

Good economic news with respect to job creation, lower number of Canadians filing for unemployment insurance, US economoy creating jobs and trimming its deficit, result in increased bond yields and therefore higher fixed rates.

In my opinion, the number one risk over the next few years as the global economy recovers is inflation. Governments spent billions of dollars to stimulate the economy by providing liquidity into the market which has to be paid for by the taxpayers eventually.  High inflation would drive up fixed rates accordingly.

To review your personal mortgage situation, please contact me.

What Determines Your Credit Score?

680, 783, 621.....How are these credit scores calculated?  There are 5 factors that determine credit score.  Here is a breakdown of each factor:

1. Payment history (35%): What's your track record? Have you missed any payments? Have you made your payments on time?
2. Amounts owed (30%): How close are you to maximizing your limit? Staying under 65% would not negatively affect your credit score.
3. Length of credit score (15%): Having a credit card or line of credit for a long period of time helps establishing a good track record assuming no payments have been missed.
4. New credit (10%): Are you applying for credit cards, retail store cards regularly? Are you applying with 5 lenders for a mortgage? Continuously looking for new credit is a negative.
5. Types of credit (10%): Healthy mix of credit cards, retail accounts, lines of credit and car loan/lease.

For mortgage lenders, credit scores above 680 are considered excellent, there are cases where some lenders require a 700+ for self employed clients.  For a copy of "Understanding Credit Score" report which provides detailed information on improving and maintaining your credit score, please click here.