Unimor Capital Corporation

Tag: private lenders

  • 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.

  • 5 Things You May Not Know About Mortgages

    5 Things You May Not Know About Mortgages

    How much of your payments go toward interest.

    Most mortgage payments are what they call blended payments, which combine repayments of the principal as well as the interest at once.  When you start paying off your mortgage, a significant part of your payments are going toward the interest, not the principal.  Over time, however, the principal of your loan decreases, which means that the amount you will owe in interest decreases as well.  As such, the portion of your payment that goes toward the interest will decrease over time, and the amount that goes toward the principal increases over time.  This is why additional lump sum payments make such a big difference when it comes to your mortgage; they go directly toward your principal, whereas your usual mortgage payments do not.

    Your current lender won’t always give you the best deal at renewal.

    Most homeowners renew their mortgage with the same lender that holds their current mortgage. No problem there – except that more than half of homeowners renewed their mortgages without negotiating different terms than what was presented to them in their renewal statement, according to a 2015 mortgage consumer survey.  Lenders are betting on the fact that you won’t want to switch lenders, and therefore aren’t bending over backwards to try and keep you.  That means that you can probably find better rates and/or more flexible terms elsewhere.  Don’t feel like shopping around?  Call your mortgage broker to do it for you.  Whether or not you used one for buying your home doesn’t mean that you can’t use them for refinancing.

    Lenders want your monthly housing costs to be less than 32% of your income.

    When your lender qualifies you for your mortgage, they use a system based on your reported and provable income as well as your debts.  They want to ensure that your monthly housing costs – including your mortgage, property taxes, heating, and condo fees, if applicable – don’t use more than 30-32% of what you’re brining in.  While this number is somewhat arbitrary and housing costs, incomes, and living expenses vary from one housing market to the next, if you don’t meet the criteria, then your mortgage application could be denied.

    Missing a mortgage payment doesn’t automatically mean foreclosure.

    It’s pretty obvious that missing a mortgage payment isn’t a good thing.  But life is full of unexpected surprises, and if you find yourself in a situation where you can’t come up with your mortgage payment one month, don’t throw your hands in the air and wait for the bank to issue an eviction notice.  Foreclosure proceedings are a lengthy process, and everyone, your lender included, wants to avoid them if at all possible.  So if you know you’re going to miss a mortgage payment, or if you already have, pick up the phone and call your lender.  You may be able to negotiate with them and figure out a new or interim payment plan to get you back on your feel, or maybe an early refinancing in order to lower your monthly payments.

    The posted rate isn’t always the best rate.

    Think of the posted rate as the opening offer in a negotiation.  Banks use the posted rate to provide a value proposition to their clients.  They often start with the posted rate and then offer discounts to preferred clients.  A savvy consumer needs to educate themselves and shop around.  Even if you get the secret or discounted rate, if you only get rates from one financial institution, you may still be paying a premium compared to other lenders.

  • The New 2018 Mortgage Rules

    The New 2018 Mortgage Rules

    What are the 3 new 2018 mortgage rules?

    It’s going to get a lot harder for some home buyers to get a mortgage in 2018. That’s because the Office of the Superintendent of Financial Institutions (OSFI, Canada’s banking regulator) introduced three new rules on mortgage lending that takes effect in 2018 and the new rules will hit first-time home buyers and those thinking of refinancing their homes the hardest.

    1. Stress Test
      Starting on January 1, 2018, the OSFI has set a new minimum qualifying rate, or ‘stress test’ for all prospective home buyers, even those with a down payment of over 20%. Before the new, tougher rule, only buyers that had a down payment of less than 20% had to make sure they could pass a stress test. Regardless of how much money you save for a down payment, if you don’t pass the new stress test, the bank won’t give you a mortgage.Under the new mortgage stress test, potential home buyers need to qualify for a mortgage at a rate that is the greater of two indicators: either 2% higher than the mortgage rate they qualified for, or the Bank of Canada’s 5 year benchmark rate, which is currently at 5.14%. Before the new stress test, home buyers or owners qualified at the rate offered by the lender. The actual mortgage payment will still be paid at the negotiated rate, but a higher calculation is used for qualifying purposes.
    2. Enhanced Loan-To-Value Measurements
      Traditional mortgage lenders (Canada’s big banks) need to ensure the Loan-To-Value (LTV) ratio remains “dynamic.” That means it needs to be adjusted to local market conditions. The OSFI insists that lenders (excluding private lenders) have internal risk management protocols in higher priced markets, like Toronto and Vancouver. A LTV ratio is a number that describes the size of a loan compared to the value of the property.Canada’s big banks use the LTV ratio to determine how risky a loan is; the higher the LTV ratio the greater the risk. For example, if property values decrease following a housing bubble, the LTV ratio could actually rise and be higher than the total value of the property. In which case, it’s quite possible that you have negative equity in the house.
    3. Restrictions Placed on Certain Arrangements to Avoid LTV Limits
      Mortgage lenders (again, this does not include private lenders) are not allowed to arrange a mortgage or other financial product with another lender that gets around the maximum LTV ratio or other limits placed on residential mortgages. If you apply for a mortgage with a LTV ratio of 80% and the lender can only approve you for 60%, in the past, the lender could partner with a second lender for the additional 20%, bundle it together to get a complete LTV loan of 80%. Traditional lenders cannot do this anymore.

    What does this mean for homebuyers and sellers?

    The three new mortgage rules that kick in as of January 1, 2018 will hurt the fastest growing segment of Canada’s mortgage market—uninsured mortgages. That’s one out of every six prospective homebuyers in the country.

    The strict stress test, which is meant to ensure borrowers can afford to pay their mortgage at a higher rate, is now being applied to all home buyers, even those with a down payment of 20% or more. Once the tests are in place, it is estimated that it could lower a family’s purchasing power by up to 21%.

    Economists say the stricter mortgage rules will also negatively impact softening housing markets across the country. It is expected the tougher mortgage rules, once fully implemented, will depress housing demand by up to 10%.

    If you’re a homebuyer and want to refinance a mortgage, the new mortgage lending rules will be a lot more difficult to negotiate.

    Should you be worried?

    If you’re a first-time home buyer, the stricter mortgage lending rules mean you might need to rent for a little longer or wait until your income increases before you can buy a home. Because the purchasing power does not go as far as it once did, first-time home buyers might need to consider something besides a detached house—a townhouse house or a condo. Or, first-time homebuyers may need to get a co-signer to qualify under the strict new rules.

    There are other options though. Keep in mind; the stricter mortgage lending rules only apply to those homebuyers looking to secure a mortgage with one of Canada’s federally regulated mortgage lenders, which does not apply to private mortgage lenders.