Unimor Capital Corporation

Tag: mortgage

  • How to Deal with Mortgage Arrears

    How to Deal with Mortgage Arrears

    These days, many Canadians are finding it hard to keep up financially, a result of the COVID-19 pandemic which caused many to lose income or their jobs altogether. Prices on many things have gone up and some are now being forced to go into arrears on their mortgage.

    If you signed your mortgage years ago, you would have had no way to predict such an unprecedented global event and now you have to adapt. The biggest fear for many borrowers is to go into arrears and lose their homes. There’s good news, however. Banks are well aware that people’s financial situations can change unexpectedly, especially in times like these. Because of that, there are various options open to you if you feel the need for extra support. In this article, we will cover the current state of mortgage arrears in Canada and options for those in financial trouble.

    After an explosion of mortgage arrears, Canada is slowly starting to recover.
    If you have gone into arrears on your mortgage, just know that you’re not alone. In October of 2020, the rate of mortgages in arrears in Canada peaked at 1.59%. This is the highest rate of arrears in Canadian history, after a previous peak in the 1980’s. In an effort to help borrowers during the pandemic, banks and lenders offered many deferrals on their mortgage payments. In addition, the rate of mortgages being extended went up greatly.

    We will go into deferrals and extensions in more detail below, but one thing important to know is that in the large part they are working. Canada Mortgage Housing Corporation data now shows that of the mortgages that went into deferrals during 2020, the vast majority of deferrals ended and were able to continue payments once again. Additionally, the rate of extensions on insured and uninsured mortgages is in decline.

    The figures for mortgages in arrears are now on their way back down from the peak. Generally, the rate of arrears can be an indicator of economic health. This means a lower rate of arrears indicates that more Canadians are in a healthy financial position, and our economy is recovering from recession.

    How excess mortgage lending puts Canadians at risk.
    For many years now, the ratio between the value of Canadian mortgage loans and the income of borrowers has been high. That means that today, a large amount of a household’s disposable income goes towards their home. This wasn’t helped by the recent boom in housing prices.

    Unfortunately, this puts some financial risk upon the borrower. A slim margin between income and the value of mortgages leaves little wiggle room when financial pressures crop up. This means it is easier than ever for Canadians to find themselves unable to keep up with payments.

    This is one reason why the government instituted the mortgage stress test, to ensure that lenders would be protected from borrowers falling into arrears. This is also why mortgages with a down payment of less than 20% are required to be insured.

    What to do if you are in financial trouble.
    The most important first thing you can do before going into arrears is to attempt to reduce your costs and contact your lender. Be upfront and honest about your current situation and ask about what arrangement you can come to based on what you are able to pay.

    Lenders will be more likely to help you come to an arrangement if you contact them before going into arrears. Therefore, do your best to contact them before you miss any payments if at all possible. If you can not reach a solution with your lenders, your next step should be to consult a lawyer or credit counsellor. They can help you explore alternative solutions that may be available.

    Common Options to Avoid Mortgage Arrears

    Payment Deferrals: A mortgage deferral is a special agreement that mortgage owners can make with their bank when they find themselves unable to pay their regular mortgage payments. The deferral lasts for an agreed period, during which time you do not have to make any payments.

    Once the period is up, you will once again begin paying your mortgage payments and will be responsible to pay off any missed payments and interest. Likely either your regular payment or amortization period will have to be adjusted as a result of the deferral.

    If you expect financial hardships to be a temporary situation for you, a deferral can help you out in a pinch. If you are likely to continue experiencing hardships after your deferral expires, it might not be the best option for you.

    Some of the factors that financial institutions consider when deciding if you are eligible for a mortgage deferral include:

    • Are you or your family unemployed due to the pandemic, or have you suffered a significant loss of income as a result of the pandemic?
    • Is your mortgage insured or uninsured?
    • Is your mortgage in otherwise good standing?
    • Is the property your principal residence or not?

    Payment deferrals can affect your mortgage in a big way. The effects of a deferral can impact your payments, your interest, and your mortgage principal. If you defer your payments, you are effectively keeping the same principal value on your mortgage while it accrues interest. At the end of the deferral, you will still need to pay the same amount plus any additional interest. The bank will collect your deferred interest after the fact by adding it to your mortgage principal, which is then used to calculate your future interest payments. In effect, this means after your deferral you may actually pay interest on interest.

    Extending the Amortization Period of Your Mortgage: By extending the amortization period of your mortgage, you are essentially agreeing to pay it out over a longer period of time in return for a lower regular payment. Depending on your situation, you may be able to extend out to a limit of 25, 30, or 40 years. The exact length available will differ between insured mortgages and uninsured mortgages. Remember that the longer your period, the longer you pay interest. This option may allow you to save on payments but can add up to thousands of dollars in interest.

    Switching to a Blended or Extended Mortgage: A blended mortgage means that your financial institution will allow you to benefit from current, possibly lower interest rates. Now, they won’t give you a lower interest rate outright. Rather, they will blend your current rate with the lower one, thus the name. Unfortunately, this option will only be available if a better rate exists to blend with. In addition, you can often extend your mortgage term to take advantage of the lower rate for longer.

    Locking in a Fixed Rate: If you have a variable rate mortgage, you may be able to opt to convert it to a fixed rate. Technically you can do this any time as a security measure to protect yourself from fluctuating variable interest rates, but it will only save you money if you lock into a lower fixed rate than your current variable rate. If you decide to take this option, make sure you act promptly, as rates can change often.

    Skip a Payment or Make Interest-Only Payments: Your bank may offer other payment options that stop short of a complete deferral. One such option is to skip only one or two payments. This is essentially like a mini-deferral. Another option is to agree to lower your payments temporarily, without stopping them altogether. A third option allows you to pay only interest for a period while deferring the principal payments to be paid later.

    Home Equity Line of Credit (HELOC): A HELOC allows you to borrow and pay back credit against your home’s equity. HELOC’s have a variable interest rate and the credit limit can change at any time as well, so they are not the best option for paying mortgage payments.

    Other options beyond working with your lender include getting a loan or assistance from family, renting out a portion of your home for extra income, selling off valuable assets to raise funds, or taking on a second job. It can be a stressful and scary situation to be in arrears on your mortgage payments. The biggest takeaway is to remember that many people have been there before you. That’s why lenders have many measures in place to help you recover in hard times. If you find yourself in this position, consult your bank as soon as possible on the best options for you.

  • How to Find the Best Mortgage

    How to Find the Best Mortgage

    When shopping for a mortgage, it’s important to do your research. A mortgage is, after all, the biggest financial commitment most Canadians will ever make. So it’s no surprise that one of the first things prospective homebuyers do is to shop around for the best mortgage rate they can find. And while getting a great rate is important, if that’s your only focus, it could end up costing you.

    Beyond the Rate – What to Look for in a Mortgage?
    With so many banks and financial institutions vying for your business, mortgages these days come with a variety of options. In a way, shopping for a mortgage is like shopping for a new car. But you would never base your car buying decision on one single factor, would you? The same goes for your mortgage. Let’s take a look at some of the things you should look for in a mortgage, and why they’re important.

    The Difference Between Mortgage Term & Amortization
    Both the term and amortization of a mortgage refer to a period of time. The amortization of a mortgage represents the entire repayment period of the mortgage. In other words, the number of years before your mortgage will be paid in full. In Canada, the standard amortization period for most mortgages is 25 years, in fact, 25 years is the maximum amortization for any mortgage that is insured by the Canada Mortgage and Housing Corporation (CMHC). Conventional mortgages (non-CMHC) can often be stretched over 30 years.

    Conventional vs Insured Mortgages (CMHC)
    Whether your mortgage will be conventional or CMHC insured depends on the amount you have available for a down payment. To qualify for a conventional mortgage, you’ll need to provide at least 20% of the purchase price as a down payment. That can be difficult for many new homeowners, especially in expensive markets like Toronto, or Vancouver, which is why CMHC enables borrowers to obtain an insured mortgage with as little as 5% down.

    The impact of CMHC premiums on the overall cost of a mortgage can be significant and should be considered when deciding how much mortgage you can afford. To illustrate the difference between conventional and CMHC, let’s assume the purchase of a $300,000 home:

    Conventional Mortgage (20% down payment)
    Purchase Price $300,000 – Down Payment $60,000 = Total Mortgage Amount $240,000

    CMHC Insured Mortgage (5% down payment, with 4% CMHC)
    Purchase Price $300,000 – Down Payment $15,000 + CMHC $11,400 = Total Mortgage Amount $296,400

    In the first scenario, assuming a 25-year amortization, monthly payments, and an interest rate of 2.87%, your total cost to pay off the mortgage would be $335,952. Using the same criteria, the CMHC mortgage would cost over $414,000, a difference of almost $80,000. Of course, interest rates will change over the years, and there are other incidental costs not included here, such as the PST on the CMHC premium, but this gives you an idea of why getting the best interest rate shouldn’t be the only consideration when shopping for a mortgage.

    Fixed Rate vs Variable Rate
    One decision you’ll need to make is whether to go with a fixed or variable mortgage. With a fixed mortgage, the bank is guaranteeing you an interest rate that won’t change for the length of the term you choose. For example, if you went with a 5-year mortgage term, at a rate of 2.99%, you’d have the security knowing that your rate won’t change for the next 60 months. You have a peace of mind knowing that your mortgage payment amount also, won’t change.

    With a variable rate, you’re choosing a floating rate that is tied to a benchmark rate, usually the Bank of Canada prime rate, or your bank’s prime rate, which may differ slightly. While fixed rates offer safety, and cost certainty, variable rates offer their own advantages. With a variable rate, you stand to benefit in a falling rate environment. If the Bank of Canada reduces the prime rate, your mortgage rate will drop accordingly. Not only that but if fixed rates drop, you usually have the option of switching into a lower fixed rate at any time. With a fixed rate, it’s much more difficult to get out of your existing term without paying a large penalty. The risk with a variable rate mortgage is that if rates increase sharply, you could find yourself in the precarious situation of having to increase your mortgage payment in order to keep up with the contractual amortization.

    Open vs Closed Mortgage
    Most borrowers will choose a closed mortgage, regardless of whether they’re going with a fixed or variable interest rate. The reason is simple: closed mortgage rates are lower. An open mortgage, on the other hand, is just as it sounds. The borrower has the option of breaking the term, or paying the mortgage in full, without incurring a penalty (in some cases, you may see an administration fee associated with breaking an open mortgage).

    There are situations where it may be worth going with an open mortgage, even at a higher interest rate. For example, if you were planning to payout your mortgage in full in the near future, you would avoid the costly penalties associated with a closed mortgage. Potential scenarios would be if you were expecting a large inheritance, or if you were selling your home, with no intention of buying another one, or you were planning to rent a house or apartment instead.

    Understanding Your Mortgage Prepayment Options
    This is one that not a lot of people think about when shopping for a mortgage. Even if you go with a closed mortgage, most financial institutions will allow you to pay the mortgage down ahead of schedule, by providing the borrower with various prepayment options.

    However, not all mortgages are created equal. In other words, the prepayment flexibility can vary greatly between mortgage providers. Some banks or credit unions will allow you make lump sum payments of 10% of the original mortgage amount each calendar year, others will allow 15%.

    To use another example, both CIBC and TD Bank will allow you to increase your regular monthly principal and interest rates by double (100%) without any penalties, while other institutions will only allow you to increase your payment by 10-20%. If you have a lot of budget flexibility and plan to pay down your mortgage more quickly, the difference in policy could save you thousands. When shopping for a mortgage, make sure you understand the prepayment options that are offered.

    Dealing with the Bank or a Mortgage Broker?
    One of the decisions you’ll need to make when you begin your search for a mortgage is whether to go directly through your bank or deal with a mortgage broker. For years now, mortgage brokers have been a popular option, and represent a perfectly valid solution. A mortgage broker offers some key advantages. For starters, they deal with dozens of financial institutions, so they really are a great place to go, to source out the best mortgage rate.

    If you’re not considered a strong borrower, perhaps your credit history isn’t great, a mortgage broker can find a financial institution that will be willing to take on your application. Generally speaking, Canada’s big six banks tend to be the most conservative when it comes to mortgage lending, so it can be tough to meet their criteria if your credit is less than stellar, or your employment situation is not standard. This is where a broker can add value.

     

  • Inside the Mortgage Approval Process

    Inside the Mortgage Approval Process

    Documents Required to Get the Best Mortgage Rate

    So, you’ve found the perfect home, you put in an offer and it’s accepted­­—with the condition of financing, of course. Now it’s time to seal the deal and this boils down to money. So you call your lender to finalize the mortgage. That’s when you’re going to get hit with a list of paperwork that’s required for your application. Below is a list of paperwork that you may need to complete your mortgage application:

    Personal information: Age, marital status, number, and age of kids.

    Employment details: This includes proof of income (such as T4 slips, copies of your last two paystubs, personal income tax returns, Notice of Assessments from CRA for the last two tax filing years, and a letter from your company stating your position, length of employment and salary).

    If self-employed you’ll need to provide: Incorporation documents, if applicable, as well as financial statements for the corporation for the last two to three tax years. You’ll also be required to submit full personal tax returns as well as CRA Notice of Assessments for both the corporation, as well for you personally. The lender may also ask to see portions of your books, such as your General Ledger or Profit & Loss statements. Talk to your accountant or bookkeeper for these reports.

    Other sources of income: Typically this is a statement on your part, but the lender could ask for back-up documentation. Other income can include pension, rental income, part-time work, etc. You’ll probably be asked for copies of your tax returns, or copies of paystubs or rental income documentation.

    If you already own property: A copy of the mortgage statement on your current property and a copy of last year’s property tax statement and, perhaps, this year’s up-to-date property tax statement.

    Current banking information: Including bank, branch, accounts, and balances.

    Verification of your down payment: This can be a snapshot of a bank account where the money is currently deposited, or a letter from a family member stating that the money is a loan or gift.

    Consent to run a credit history search: Every lender will either verbally ask for permission (and then obtain your Social Insurance Number) or ask you to sign an authorization form allowing them to pull your credit history.

    List of debts (otherwise known as liabilities): This is where people sometimes opt to exclude a few items owed, but you need to resist this urge. Your credit history will show all outstanding money owed, so be upfront and honest. Provide a list of what is owed, to whom you owe it to and what monthly payments, if any, you put towards paying down the debt. The list should include student loans, credit card balances, car loans, monthly lease (or lease-to-own) arrangements and personal loans.

    Copy of the listing: You will need to print off a copy of the listing and include this in your mortgage documentation package.

    Copy of purchase document: You will need a copy of the document you signed to buy the home. Known as the Agreement to Purchase and Sale, it’s the document that states the address, what’s included/excluded and the price, deposit, and down-payment you agreed to.

    Condo documentation: If you’re buying a condo or strata-townhome, you’ll also need to include the condo corporation’s financial statements and status certificates.

    Rural property: You’ll need to include the certificate for the well and/or septic tank if you’re property isn’t on municipal water and sewer.

    If you want to reduce your stress during the financing phase of your home purchase, and you don’t want to or can’t submit all this information prior to finding a property then consider gathering up all this documentation ahead of time. Just having all the documentation at the ready will reduce your workload and free you up to concentrate on last-minute requests.

     

  • Tips for Reducing the Overall Cost of Your Mortgage

    Tips for Reducing the Overall Cost of Your Mortgage

    Should You Pay Off Your Mortgage Early

    When you get your first mortgage, it’s hard for many people to focus on the end game, especially given that so many people put so much effort into saving up the minimum down payment, or even making use of grants or various cash-back programs that some lenders offer. It’s important that you keep all your options on the table so that when you’re ready to focus on your long-term strategy, your mortgage allows you to take action, whatever that may be.

    Option #1: Start smart and maximize your down payment.
    While it’s possible to get away with only putting 5% to 10% down on a home purchase, the single biggest cost-cutting measure you can do is to maximize your down payment. Not only will you owe less, reducing the overall interest you pay, but you’ll avoid having to pay mortgage loan insurance premiums—a fee buyers pay for the privilege of putting less than 20% down on a home.

    Option #2: Buy what you can afford.
    It sounds simple. Buy a home that fits your budget; the reality is when it comes to buying a home most of us struggle. On one side we want our dream home. On the other is the desire to be fiscally smart. Quite often, it’s a trade-off. But if you focus on buying within your budget (not the maximum mortgage amount your bank has agreed to lend you, but the mortgage that works with your financial plan), then you’re less likely to dip below the 20% down payment, and more likely to stick to your plan of paying off the debt sooner.

    Option #3: Shop for the best rate.
    Buying a home is stressful. Quite often, buyers will stick with banks or financial institutions they know. But when shopping for the best mortgage rate, it’s actually better to cast your net wide and far. Consider credit unions, as quite often these institutions can offer much better rates and terms than some major banks.

    Option #4: Pay attention to when interest is charged.
    Most standard mortgages in Canada charge interest semi-annually—that means twice a year the lender calculates what interest you owe, based on the outstanding principal debt and the accumulated interest on that outstanding debt. This is known as semi-annual compounding interest (compounding because it’s interest on interest). The rate at which compound interest grows depends on the frequency of compounding, the higher the frequency, or the number of compounding periods, then the greater the compound interest. For that reason, a loan with a 10% interest rate, but compounded annually, will actually accrue less interest than a loan with 5% interest that is compounded semi-annually, over the same time period.

    Option #5: Accelerated payments.
    When finalizing your mortgage consider going from one monthly payment to accelerated payments. This adds two extra payments per year, which reduces your principal debt just a tad bit faster.

    Option #6: Lump sum or extra payments.
    But the real key to paying off your mortgage debt faster is to get a mortgage that allows you to make extra payments. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of principal, without extra fees. These extra payments go directly towards paying down the principal. If possible, however, try and avoid mortgages that only allow you to make extra or lump sum payments on the mortgage anniversary—as this can reduce the likelihood of the extra payment.

    Option #7: Lower your amortization.
    Those who want to pay off their mortgages sooner should choose the shortest possible amortization. While typical amortization periods are for 25 years, you can opt for as short as 10 years or as long as 30 years (if you made a down payment of 20% or more on your home). Forcing yourself to pay off the mortgage in fewer years translates into lower interest costs and substantial savings. The hitch? Your regular monthly or accelerated payments will be much higher.

    Option #8: Increase your regular payments.
    To give yourself the best of both worlds, consider going with a longer amortization, but increasing your regular payments using your mortgage loan prepayment privileges. For instance, if your monthly mortgage payment is $1,000 you could increase this to $2,000 per month if your loan terms allowed for double-up payments. In effect, you would be paying off a 20-year mortgage in just 10 years. Better still, you’d have the flexibility to switch back to the lesser regular monthly payment if you were to experience any changes like a sudden job loss or the birth of a child.

    In the end, the answer as to whether or not you should pay off your mortgage early really boils down to what’s important to you in both your short-term and your long-term financial plan.

     

  • How to Get Around Canada’s New Mortgage Rules

    How to Get Around Canada’s New Mortgage Rules

    The tighter lending rules that came into force July 1st are making it harder for some Canadians to buy homes, but mortgage professionals say there’s no reason to panic. The Canada Mortgage and Housing Corporation (CMHC) announced plans in early June to reduce borrowing limits, demand higher credit scores and restrict down payments for anyone who needs default insurance from the agency. That kind of insurance is mandatory for ‘high-ratio’ buyers putting less than 20% down on a home. While the change is scary, buyers still have ways to shape up in the eyes of the CMHC — or dodge the agency entirely.

    Evan Siddall, President & CEO of CMHC, explains the changes are meant to steady the economy in the age of COVID-19 by controlling debt and protecting lenders from people who pose a high risk of defaulting. While the rules will sting for some people trying to crack their way into the real estate market, they could be a boon for others. By reducing the number of buyers, the crown corporation hopes to quell demand and balance out home prices.

    “COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” Siddall explained in a statement. These actions will protect homebuyers, reduce government and taxpayer risk, and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.

    What are the new rules?
    First, homebuyers seeking a high-ratio mortgage are no longer able to submit a down payment with money borrowed from credit cards, unsecured personal loans, or lines of credit. Only ‘traditional sources’ of cash, such as savings, equity from the sale of a house or financial support from relatives, will fly.

    Second, the minimum credit score to qualify has jumped from 600 to 680. If you don’t know your credit score, you can check it for free online. If it’s too low, you’ll have to take steps to improve it.

    Third, borrowers are now capped at spending 35% (GDS) of their gross income on housing. That includes the mortgage itself, property taxes and utilities. They’re also only able to spend up to 42% (TDS) of their gross income, taking into account all of their other loans and credit.

    Before, buyers could spend up to 39% of their gross income and borrow up to 44%. That means potential buyers saw their purchasing power cut by up to 12%. For example, someone with a $100,000 income buying a single-family home could have qualified for a $490,000 mortgage with 5% down before July 1st. Now, their limit has dropped to $435,000.

    What should homebuyers do?
    It’s important to recognize that, if you’re not a risky borrower in the eyes of the CMHC, these changes may not affect you at all.
    “They are impacting a subset of borrowers who need mortgage insurance,” says Toronto-based broker Sean Cooper, author of the book Burn Your Mortgage. Even those homebuyers, he says, “still have options.”

    You see, the government doesn’t care whether it insures your mortgage. It just needs to know your mortgage is insured. Homebuyers excluded by these changes should look around for a lender that also works with Genworth or Canada Guaranty, the country’s two private-sector providers of mortgage default insurance. Those companies have decided not to tighten their restrictions.

    “They are usually lockstep with the CMHC, so this is definitely out of the ordinary,” says Cooper. So even if the CMHC thinks you’re a bad bet, you’ll still find a range of lenders that want your business.

    Is anyone else affected?
    The other good news is that the new lending rules don’t impact homeowners who want to take advantage of today’s historically low rates.

    “As of right now, the rules haven’t changed for refinancing,” says Cooper. “The fact that Genworth and Canada Guaranty didn’t match the CMHC’s changes makes me think that there’s less likelihood of more changes in the future.”

    Today’s rock-bottom rates are predicted to last for at least 12 to 18 months, until the economy starts to stabilize from COVID-19 crisis. That means there’s no better time to see how much you can save on interest and your monthly mortgage payments. The opportunity to hold on to more cash is especially welcome while the country’s financial outlook remains uncertain.

  • COVID-19: Should You Buy a Home Now, or Wait?

    COVID-19: Should You Buy a Home Now, or Wait?

    Housing markets across the country are changing swiftly—but with interest rates at historic lows, this might be a good time to buy.  Here are all the factors to consider.

    It almost goes without saying that COVID-19 has had a far-reaching impact on the Canadian economy and healthcare system in the first half of 2020. As expected, the spring housing market was much cooler than 2019, with the Canadian Real Estate Association (CREA) confirming that May 2020 recorded the lowest volume of sales in May since 1996.  Despite the significant drop in sales volume due to the pandemic, though, national home prices remained relatively stable.

    After a quiet April, market activity began to pick up in local housing markets across the country in May: more buyers resumed their home searches, and more sellers began to list their homes. With more home buyers and sellers hopping off the sidelines, housing competition is starting to heat up in many regions.  In Toronto and Vancouver—Canada’s largest markets—demand and supply were evenly matched in May, whereas in Southern Ontario markets like Ottawa and Hamilton-Burlington, buyers faced ever fiercer competition for available homes than last year.

    Given how swiftly conditions have changed and continue to evolve in housing markets across the country, prospective home buyers may be wondering: Is now a good time to jump into the market?  Perhaps.  With interest rates at historic lows, if you are able to buy and hold a home for the medium to long term, this might be a good time to buy.  Here are all the factors you should consider as you make your decision.

    Account for your finances and your lifestyle needs.

    For many Canadians, finances are just one part of the story, and the decision to buy a home often goes beyond the dollars and cents.  To put it simply, people need to make changes in their lives and move—regardless of whether there is a pandemic or not.  If you have done the math and are confident about your financial ability to carry a new home, this is a great opportunity to take advantage of low interest rates.

    Consider why you want to buy in the first place.

    Perhaps you’ve had a relationship or family change; a divorce or a baby on the way are common reasons people choose to move.  Alternatively, do you want to be closer to family, in a good school district, or have better transit access?  If you started planning a move before the pandemic, consider whether and how COVID-19 has altered these priorities.

    Once you’ve determined why you need to move, consider how your lifestyle needs may evolve.  After all, you will be living in the home you purchase for at least a few years, so you need to think about whether the home you buy is a fit for your needs both today and tomorrow.  If you can find what you want, in the location you desire, and are comfortable living there for at least five years, take the leap.

    Get local with market data.

    When you’ve made the decision to move forward with a home search, you’ll likely turn your attention to how the housing market is performing.  After all, buying a home is a major personal commitment, and also one of the biggest financial investments most people will make.  With everything going on, in addition to sales updates from national and local real estate boards, a number of Canada’s most established financial institutions, economists and housing corporations have attempted to predict the size and duration of the impact of COVID-19 on the housing sector.

    While high-level data from real estate boards and financial institutions can provide valuable perspective on how the housing market is performing at the macro-level, real estate is hyper-regional, and in many respects, local.  The type of property, the neighbourhood you’re interested in, and your budget will all play a role in the level of competition you’re likely to face and ultimately the price you can expect to pay.

    Working with a real estate agent you trust is one way to cut through the noise and understand how far your dollar will go in real estate based on your situation and your needs.  A good real estate agent acts as a trusted expert who can provide you with the facts, data and insights that are most relevant to your purchase decision, so you can make an informed choice that you are comfortable with now and in the future.

    Remember that real estate is a long-term decision.

    Finally, remember that real estate is a long-term investment.  If you are looking to make short term, speculative investments, this is a particularly risky time to do that in real estate.  Further, churning real estate has real costs that eat into any sale price, which include but aren’t limited to land transfer taxes, realtor professional fees and moving costs.

    Once you’ve carefully weighed your personal needs against your financial appetite and obligations and have also considered the context of the real estate market in your area, take the plunge if you’re confident that everything lines up.  If you can buy and hold for the long term, there are some great pockets of opportunity out there.

     

  • Why These Homeowners Needed a Private Mortgage

    Why These Homeowners Needed a Private Mortgage

    Most of us don’t give much thought to private mortgages.  We are vaguely aware they exist, but perhaps have the impression they are mortgage solutions for financial derelicts, but that is not true.  Often, they are needed when bad things happen to good people.

    Private mortgages and B-lender mortgages are the fastest-growing segment of the Canadian mortgage industry.  One reason is because it’s much harder to qualify for an A-lender mortgage now than at any time in recent memory. High home prices, in major cities particularly, result in large mortgage requirements, and the mortgage stress test can put qualification out of reach for homeowners who previously had no such concerns.

    In addition, there are several situations people find themselves in which are not attractive to regular mortgage lenders.  These problems require solutions, but a different type of lender needs to step forward and help the homeowner get on track. Let’s look at three such situations.

    • This homeowner has too many debts, and his credit score is low. Notwithstanding lots of equity in his home, the banks have said no.
    • These homeowners are in the middle of a consumer proposal. The doors to the banks are firmly closed, yet they need to finance a car purchase, and they would like to improve their monthly cash flow.
    • This homeowner has large CRA debt. Banks and other A-lenders do not like refinancing to pay off CRA debt.

    1) Too Much Debt and Credit Score Too Low
    This person has been living proud and mortgage-free for several years, but meanwhile has racked up credit card debt that just won’t go away.  At first, people believe they can manage it, but the crippling high interest rates of 19.99% or more makes it difficult.  And when the cycle starts, they tap into other available credit to pay off the credit cards that are giving them a problem.  He has a nice town home with no mortgage, but $115,000 of unsecured debt and a credit score of 557.  The minimum monthly payment on the credit card debt was not much less than his take home pay from his job.

    The Solution
    We could see his credit score would zoom upwards once all the debts were cleared and no remaining balances.  A private lender would be happy to lend a new first mortgage on very favourable terms.  An annual mortgage interest rate of 5.99%, and a mortgage fully open after three months.  This means as soon as he is ready, he can refinance to an A-lender without penalty.  And when that happens, all the ugly credit card debt will be scrunched up into a mortgage at roughly 3% interest, with a monthly payment of around $500.  This is a game-changer compared to the $3,000 per month or so he was paying before.

    2) A Consumer Proposal
    These homeowners both have decent jobs and more than $200,000 equity in their home.  Three years ago, they both had to file a consumer proposal after a new business venture failed and left them with lots of consumer debt.

    They reached out for three reasons:

    1. Their bank, which holds their first mortgage, has told them they will not offer a renewal in late 2020.
    2. Their car lease is expiring in January 2020, and they want to exercise the buy-out option. They are being quoted high interest rates on a car loan.
    3. They are finding it tough, paying $1,300 each month towards the proposals, on top of their car payment, mortgage, taxes and utilities.

    The Solution
    The solution here is a one-year, private second mortgage for around $60,000.  Interest-only payments at a rate of 12%, and the monthly payment is only $600, which is half of what they are paying now on their consumer proposal.

    This small new mortgage will pay off their proposal completely and allow them to buy the car when it comes off lease.  After their proposal is paid off, they can rebuild their personal credit histories.  In late 2020, when their first mortgage matures, they won’t have to worry about the renewal.  They can refinance both mortgages into one new mortgage with a different lender.

    3) CRA Debt Problem
    This homeowner only owes $70,000 on his first mortgage, but he had neglected filing corporate taxes for a few years, and now owes CRA a significant amount of money.  There was a judgment against him for $49,000, which had been registered as a lien against the family home.  And another one looming for $133,000.  He had also accumulated a large amount of unsecured debt.  If you are self-employed and owe a lot of money to CRA, your borrowing options are very slim in the world of conventional mortgage lenders.  Occasionally, homeowners have tax debt that is so large it cannot be readily paid.  The result is a debt that can’t be negotiated away, with a creditor you can’t afford to ignore.

    The Solution
    The solution was either going to be a very large, disproportionate private second mortgage at a high interest rate (close to 12%) or to refinance the small first mortgage to a new private first mortgage at only 6.99%.

    He decided to take the first mortgage approach; paid off the CRA liens and all other personal debts.  As a bonus, the lender allowed him to partially pre-pay the mortgage payments in advance, so that the monthly payment for the new mortgage would be roughly what it will be when they refinance down the road – avoiding payment shock.  He contacted Equifax Canada to confirm the tax liens had been cleared and waited for his credit score to climb, unencumbered by a high debt load.  Sure enough, it all came to pass, and now he is refinancing the private mortgage into an A-lender, only six months later.

    These are three scenarios why a person may need a private mortgage, there are many other reasons.  It is important to remember that a private mortgage is a short-term solution to get you out of a tough financial situation.  It does not mean that you’ll be black-listed in the world of mortgages.

  • Millennial’s Guide to Home Buying

    Millennial’s Guide to Home Buying

    The transition from rent to home ownership has many obstacles for millennials. We’ve put together this guide to help young people make home ownership work for them. Buying your first home is one of the biggest financial decisions you’ll ever make.  For millennials struggling with lower income and savings, the dream of home ownership can appear out of reach in today’s market.

    All hope is not lost. Low mortgage rates and a gradually improving job market are empowering millennials to invest in property rather than rent. By taking a few practical steps, you can be well on your way to buying your first home. Investing in your first home requires careful planning, effective judgement and setting reasonable expectations.  Below is a six-step process for making that happen.

    1. Shop within your means.

    If you’re a millennial first-time buyer, the selection of homes you can afford is likely much smaller than established buyers. After all, you don’t have any equity yet, and will be relying purely on savings to invest in your first down payment. An important part of setting reasonable expectations is shopping within your means. Even if you qualify for a large mortgage, there’s no rule that says you must use it all. As a first-time home-buyer, your goal should be to finally start building equity. If you want a property but can’t afford it, you shouldn’t buy it. It’s as simple as that!

    1. Make sure you have enough for a sizeable down payment.

    In Canada, most professionals will advise you to make at least a 20% down payment on your property to avoid paying homeowner insurance.  While this is recommended, it might not always be possible, especially if you don’t want to delay your first real estate investment.  Even if you can’t pay at least 20%, you should still be prepared to make a decent down payment to minimize the total loan amount.  In Canada, 5% is the absolute minimum you must put down.

    1. Sort out your finances.

    Home ownership carries significant expenses that extend beyond your down payment and monthly mortgage payment.  Property tax, insurance, closing costs and utilities must all be factored into your decision both at the time of closing and after you’ve moved in.  When deciding to enter the market, be sure you have enough money to cover the down payment and all the ancillary costs associated with closing your home.  You’ll also want to budget carefully to make sure you can afford to pay your mortgage and living expenses after you’ve moved in.

    1. Compare neighbourhoods and regions.

    Most home-buyers are limited by geography in shopping around for property.  For millennials living in the big city, this can make affordability a greater challenge.  That’s why it’s essential to compare neighbourhoods and property types.  It’s equally important to consider location and whether you are willing to commute to work each day.  Proximity to your job may be convenient, but will likely be more expensive, especially if you live in a big city.  Working with a real estate agent can help you develop a better view of property values based on location and property type.

    1. Use a Mortgage Broker.

    Financing a home can be a complicated process.  That’s why more and more Canadians are turning to mortgage brokers to steer them in the right direction.  It used to be the case that most people went straight to their bank to finance their mortgage.  Now, many people visit a mortgage broker first.  That’s because a broker is tasked with one job: finding you the best deal possible.  They work with the big banks as well as non-traditional lenders to match you with the best interest rate and lending terms on the market.

    1. Maximize your benefits.

    The government has made it a little easier for first-time home-buyers to enter the market.  If you’re a first-time buyer, you can use your RRSP account to finance your down payment tax-free up to a maximum of $25,000.  This means you can take up to $20,000 from your RRSP account and put it toward a down payment with no tax penalty.  The First-Time Home-buyer Credit can also help you reduce the amount of taxes you owe.  Various provinces, such as Ontario, also have a land transfer tax refund that will greatly reduce the amount of land transfer tax you owe.

    As a millennial, shopping around for your first home can be both rewarding and challenging.  This six-step process will help you make the most out of your experience.

  • How Much House Can You Afford?

    How Much House Can You Afford?

    Shop for your new home the smart way! Learn how to calculate how much house you can afford before hitting that open house or applying for a mortgage. Buying your first home is one of the most important and exciting financial milestones of your life. But before you hit the streets with a realtor, you need to have a good sense of a realistic budget. Just how much house can you afford? You can determine how much house you can afford by following three simple rules based on different percentages of your monthly income.

    The Rules of Home Affordability

    Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less.

    Your maximum mortgage payment (rule of 28): The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28% of your gross monthly income (your income before taxes are taken out). For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.

    Your maximum total housing payment (rule of 32): The next rule stipulates that your total housing payments (including the mortgage, homeowner’s insurance, and private mortgage insurance [PMI], association fees, and property taxes) should not exceed 32% of your gross monthly income. That means, for the same couple, their total monthly housing payment cannot be more than $2,133 per month.

    Your maximum monthly debt payments (rule of 40): Finally, your total debt payments, including your housing payment, your auto loan or student loan payments, and minimum credit card payments should not exceed 40% of your gross monthly income. In the above example, the couple with $80k income could not have total monthly debt payments exceeding $2,667. If, say, they paid $500 per month in other debt (i.e. car payments, credit cards, or student loans), their monthly mortgage payment would be capped at $2,167.

    This rule means that if you have a big car payment or a lot of credit card debt, you won’t be able to afford as much in mortgage payments. In many cases, banks won’t approve a mortgage until you reduce or eliminate some or all other debt.

    How to Calculate an Affordable Mortgage

    Now that you have an idea of how much of a monthly mortgage payment you can afford, you’ll probably want to know how much house you can actually buy. Although you cannot determine an exact budget until you know what interest rate you will pay, you can estimate your budget. Assuming an average 6% interest rate on a 30-year fixed-rate mortgage, your mortgage payments will be about $650 for every $100,000 borrowed.

    For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866.
    ($1,866 / $650) x $100,000 = $290,000 (their maximum mortgage amount)

    Include Your Down Payment

    Ideally, you have a down payment of at least 10%, and up to 20%, of your future home’s purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a home.

    Note: If you put less than 20% down, your mortgage lender will require you to pay mortgage insurance, which will increase your non-mortgage housing expenses and decrease how much house you can afford.