Qualifying Purchase Price – Why I’m Now Giving My Clients Two Price Points

General Kris Krawiec 10 Sep

Back in June 2012 OSFI (Office of the Superintendent of Financial Institutions) rolled out their B-20 Residential Mortgage Underwriting Practices and Procedures, in an effort to force banks and lenders to follow more prudent underwriting guidelines.

One of the most impactful changes was imposed on borrowers who want to take a Variable rate, or a term of less than 5 years. Prior to the B-20, we were able to qualify clients for these types of products using a 3-year discounted rate. To put that in perspective, current 5-year rates are between 2.99% and 3.09%, whereas 3-year discounted rates are between 2.49% and 2.79%. Now, the B-20 mandates the following:

If a client is taking a 5-year fixed rate product, we are able to qualify them using the contractual rate (ie, the discounted rate that their mortgage will be based on) and, as mentioned above, those discounted 5-year rates are currently available between 2.49% and 2.99%.

However, if a client wants a Variable rate, or a term less than 5 years in length, we are forced to qualify them using the Bank of Canada’s posted rate, which is currently 4.64%. What this does is increases the qualifying payment, and since approvals are essentially based on an income-to-debt ratio, said clients will essentially qualify for a lesser purchase price if they want one of these products.

Now, just to curb any confusion, the qualifying rate is not the rate these clients are actually paying. The contractual rate for Variable rates is currently between 2.40% and 2.50% and 2, 3, and 4 year fixed rates range between 2.49% and 2.99%. The purpose of using the Bank of Canada’s posted rate to qualify for these products is simply to prove that these particular clients could potentially handle their mortgage at a higher rate. In the event that rates eventually increase, OSFI feels more comfortable knowing that these clients will still be able to afford making their mortgage payments as they have qualified at a rate as high as 4.64%.

And thus the reason that when clients ask me what they qualify for, I am now having to give them two different price points. One price point that they qualify for on a 5-year fixed product, and a second, lower price point, that they qualify for if they want all of their product options available to them.

Verifying Your Down Payment – What You Need To Know

General Kris Krawiec 9 Sep

Saving for a down payment is often one of the biggest challenges facing young people looking to break into the real estate market.  The source of your down payment could come from your own savings, a gift from a family member, your RRSP if you’re a first time home buyer or from the proceeds of selling your current home.

No matter where your down payment comes from,one thing that is for certain is your lender will be verifying your down payment prior to full approval. It’s required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which can change your lending ratios and your ability to repay your mortgage.

DOCUMENTS YOU WILL NEED TO SHOW WHEN VERIFYING YOUR DOWN PAYMENT

1. Own Savings/Investments:  If you’ve saved enough money for your down payment, congratulations!  What your lender will want to see is a 3 month history of any source accounts used for your down-payment such as your savings account, TFSA (Tax Free Savings Account) or Investment account.

Your statement will need to clearly show your name and your account number.  Any large deposits outside of your normal contributions will need to be explained i.e.  you sold your car and deposited $12,000 or you received your bonus from work.  If you have transferred money from one account to another you will need to show a record of the money leaving one account and arriving in the other.  The lenders want to see a paper trail of where the money came from and how it got in your account.  This is mainly to combat money laundering and fraud.

2. Gifted Down Payment:  Especially in the pricey Metro Vancouver and Toronto real estate markets, the bank of Mom and Dad is becoming a more popular source of down payments for young home buyers.  You will need a signed gift letter from your family member that states the down-payment is indeed a gift and no repayment is required on the funds.

Be prepared to show the funds on deposit in your account no later than 15 days prior to closing.  Again, the lender wants to see a transaction record.  i.e. $25,000 from Mom’s account transferred to yours and a record of the $25,000 landing in your account.  Documents must show account number and name.

Gifted down payments are only acceptable from immediate family members (parents, grandparents, siblings). 

3. Using your RRSP:  If you’re a First Time Home Buyer, you may qualify to use up to $25,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.  To see if you qualify for the Home Buyer’s Plan to use your RRSP’s as a down payment visit here.  You will need to complete aForm T1036 to withdraw your funds without penalty.

Verifying your down payment from your RRSP is just like verifying from your savings/investment accounts.  You will need to show a 3 month history via your account statements with your name and account number on them.  Funds must have been in your account for 90 days.

4. Proceeds From Selling Your Existing Home:  If your down payment is coming from the proceeds of selling your current home then you will need to show your lender a fully executed purchase and sale agreement between you and the buyer of your home.  If  you have an outstanding mortgage on the property, be prepared to provide an up-to-date mortgage statement as well.

5. Money From Outside Of Canada:  Using funds from outside of Canada is acceptable but be prepared to have the money on deposit in a Canadian financial institution at least 30 days before your expected closing date.  Verifying your down payment from overseas will also require that you provide a 90 day history of your source account.

No matter what the source is, verifying your down payment will require you to show documentation of where the money originated from and be ready to explain any large deposits.  Making regular contributions into your savings or investment accounts will help develop a pattern of deposits and avoid any red flags.  Don’t stockpile your cash and make large lump-sum deposits.

Most lenders will want to see that you have 1.5% of the purchase price on deposit as well to cover your closing cost.  If you buy a home for $650,000 you will need a minimum of 5% down ($32,500) and another $9,750 (1.5%), for your closing cost.  You will need to show a total of $42,250 available on deposit.

Thanks for reading and if you need more information, please don’t hesitate to contact Kris Krawiec your Mortgage Broker at 416-845-3745 or kkrawiec@dominionlending.ca.

Have You Considered Purchasing a Mississauga Property with a Secondary Suite?

General Kris Krawiec 3 Sep

The Canadian Mortgage and Housing Corporation (CMHC) recently announcedthat in order to facilitate affordable housing choices for Canadians, it would be making some policy revisions on how they consider income derived from secondary suites. Considering the last 4 years have been nothing but tightening of rules, making it harder for Canadians to secure mortgage financing, this news is certainly welcome.

INSTEAD OF USING JUST 50% OF THE INCOME DERIVED FROM A SECONDARY SUITE, CMHC WILL NOW FACTOR IN 100% OF RENTS PAID, WITH SOME CONDITIONS OF COURSE! 

As of September 28th 2015:

  • CMHC will consider up to 100% of gross rental income from a 2-unit owner-occupied property that is the subject of a loan application submitted for insurance. The annual principal, interest, municipal tax and heat (P.I.T.H) for the property, including the secondary suite, must be used when calculating the debt service ratios.
  • For 3 – 4 unit owner-occupied and 1 – 4 unit non-owner occupied properties, the net rental income (gross rents less operating expenses) can form part of the borrowers’ gross annual income.

Additional conditions when 100% of gross rental income is used include:

  • The income must have been sustained over at least two years.
  • The income amount must not exceed the average of the past two years, to address income fluctuations, smooth out cyclical trends and unexpected events such as vacancies.
  • Up to 100% of gross rental income may be used only where prospective borrowers can demonstrate a strong history of managing credit, generally considered to be a minimum credit score of 680.

SO WHAT DOES THIS MEAN FOR YOU?

If you have been on the fence about getting into the housing market, this recent announcement highlights an option you may have not already considered. What about buying a property with a legal secondary suite to use the income to help pay your mortgage? CMHC has just made it a little more affordable to qualify for buying properties like this – certainly worth a look!

If you would like to discuss how much mortgage you qualify for and look at different scenarios of qualifying with a secondary suite rental income, I would love to have an in depth look at your finances and provide you with mortgage options! Let’s talk!

HOW TO PREPARE TO BUY A HOME WHILE YOU ARE GOING TO SCHOOL

General Kris Krawiec 3 Sep

Many people find themselves renting a home and helping others get ahead financially. When the question of “why rent” is posed, the most common answer is the issue of not having a down payment. What is interesting is that the person could afford the monthly payments but simply does not have the down payment. Home ownership in North America is less than 70%. The US Census Bureau reports that the US homeownership rate fell to 63.4% in the second quarter. This is the lowest level since 1967. In comparison, home sales are doing very well in the USA. Home construction companies are doing a booming business. Cabinet maker American Woodmark (AMWD) stock price started the year at about $29 and has hit a high of $67 a share. US private equity firm The Blackstone Group (BX) is now the single largest homeowner in America. They rent homes to those who cannot buy. Put yourself in the position to buy.

How does one go about obtaining the down payment? First let’s look at the options once you get that down payment. You could buy a condo or a townhome and have a reasonable payment. A home might seem to be out of your price range but if you purchase a $600,000 home with a rental suite with 5% down your mortgage payments would be about $2,700 a month. Take this amount then consider the $1,100 you get for renting your basement suite and your portion of the mortgage is $1,600 a month. This makes it much more affordable. Then there is also the option of renting out rooms and sharing living space for a season for additional income.

The biggest reason one does not have the down payment is lack of planning and perhaps the lack of hope for ownership of a home. Let’s take the case of a teenager. They have a vision of owning a home by the time they are 23 years old, after they have completed their degree. Let’s call them Homeowner. Another teenager has a vision of driving a nice car. We will call them Car-owner. Homeowner works hard while getting their education. There is not a lot of time between work and school. They stay at home rent free while going to school but have to pay for their schooling. They invest what is left and over the next six years watch their investments grow.

Car-owner buys a nice car; interest on the car loan is only 1.9% so almost free money. Car payments are $500 a month, insurance is $200 a month and car owner decides he wants to live independently as a renter as it is only $500 a month. While going to school Car-owner decides to get student loan so he does not have to work as much. Car-owner finds he is spending $2,000 a month on living expenses.

At age 23 they both are out of school. Homeowner looks at their savings and sees it has grown to $120,000. With this as a down payment, they can purchase a home and rent out a portion to begin their journey as a Homeowner.

Car owner gets a good job after graduating from university. Student debt is at $50,000 and the car is getting old so it is sold and upgraded to another car with another loan. Then there is the question, “How am I supposed to get a down payment?”

This is very possible and the reason why it is imperative to start taking financial small steps one day at a time. Compound savings and consistent budgeting will prove to be very fruitful in just a few short years. I have personally seen young people taking the steps to save and invest while going to university and compiling a portfolio of investments that would give them a substantial down payment. This does require sacrifice. It is a wise soul who weighs the cost in their youth and moves toward establishing a healthy financial future. I look forward to seeing more of these young people moving towards purchasing their homes and establishing themselves early in their careers.

Could Your Mortgage Use a Spring Check-Up?

General Kris Krawiec 31 Mar

Now that spring has sprung, it’s a perfect time for your annual mortgage health check-up. If you make time for a quick review each spring, it may yield you some fruitful financial savings.

Your 2015 home loan review will examine the most common potential monthly savings opportunities, including high-interest credit card debt or fixed loan payments. Reviewing your options annually could result in having more money left over at the end of each month. 

With interest rates at historic lows, now is the time to investigate all your options and perhaps save yourself thousands of dollars per year! Imagine what you could do with the savings – anything from renovating or investing to going on a much-needed vacation or putting money towards your children’s education.

Right now, you can lock into a five-year mortgage below 3%. You could have done the same in 2001 but it would have been about 7%. In 1982 it would have been 18%. Even in the low-rate days of 1952, it would have been about 5.5%.

Borrowing costs are lower than any time in modern history. If your current rate is above 3+%, now may be a good time for a free spring mortgage check-up.

Completing a straightforward annual review will keep your home financing as lean and trim as possible. In other words, you will have a clean bill of mortgage health, which is just what the doctor ordered!

If you’d like a free mortgage check-up, call or email me today! 

Mississauga Mortgage Broker Kris Krawiec 416-845-3745

Have You Considered Opting for a 50/50 Mortgage?

General Kris Krawiec 9 Mar

Hybrid mortgages – also known as 50/50 mortgage products – include an equal mix of fixed-rate and variable-rate components within your single mortgage. This means you get the best of both worlds – the security of fixed repayments with the flexibility of a variable rate.

Although there was a time in recent years when mortgage experts considered a variable-rate mortgage as the obvious choice to save mortgage consumers money over the long term, with fixed rates remaining near historic lows, a 50/50 mortgage may be a great alternative for you.

In essence, since it’s extremely difficult to accurately predict rates over the long term, a 50/50 mortgage offers interest rate diversification, which can help reduce your level of risk.

If you opt for a 50/50 product, half of your mortgage is locked into a five-year fixed rate and half is at a five-year variable rate. You can lock in your variable-rate portion at any time without paying a penalty. As well, each portion of the 50/50 mortgage operates independently – like two separate mortgages – yet the product is registered as only one collateral charge.

The 50/50 mortgage product is well-suited to a variety of borrowers, including those who:

  • Would normally go fully variable but are afraid prime rate is at its bottom
  • Aren’t comfortable being locked into a fully fixed rate
  • Can’t decide between a fixed or variable mortgage
  • Savvy first-time homebuyers

Some features of the 50/50 mortgage include:

  • 20% annual lump-sum pre-payment privileges
  • 20% annual payment increase ability
  • Portability (the option to transfer your existing loan amount to a new property without penalty)

As the 50/50 option is a fairly new offering, according to a recent study by the Canadian Association of Accredited Mortgage Professionals (CAAMP), 5% of Canadian mortgage holders have 50/50 mortgages compared to 28% with variable-rate mortgages and 68% with fixed-rate mortgages. But many experts believe the 50/50 mortgage is quickly gaining momentum.

Student Rentals

General Kris Krawiec 9 Mar

While opportunities abound in student housing throughout college and university towns from coast to coast, financing these investments can prove to be quite tricky, especially if you don’t do your homework. For one, you’re going to need a larger down payment (on average, about 20-25 per cent) than if you were to purchase a typical single family residential property (for as little as five per cent down).

And thanks to the current credit crunched lending environment, this isn’t an ideal venture for first-time investors, since lenders don’t have a large appetite for student housing and, if the loan has to be insured (less than 20 per cent down), Canada Mortgage and Housing Corporation’s (CMHC) rules will come into play.

The trouble is, should a lender have to foreclose on a student rental property, they have to ensure it’s marketable. That’s why “rooming houses” – residential properties with common living areas and a large number of bedrooms – are not something lenders will typically even look at. This would entail knocking down walls and getting the property back up to snuff as a single-family residence – something that would prove costly, both in terms of time and money, to lenders.

In fact, big banks will very rarely finance student housing and, if they do, it’s because the investor has close ties with that financial institution and deep pockets.

The thought of student housing often makes lenders and CMHC cringe due to the hands-on management required by real estate investors who venture into this niche, as well as high turnover rates. As such, your lender and CMHC, if applicable, will want to know you’ve been successfully managing this type of investment in the past. The more information you can provide to detail your game plan, the better. Things lenders and CMHC look for when considering offering financing for these types of deals include: the amount of experience a real estate investor has with hands-on management of student housing; 12-month leases signed by the students’ parents, which helps alleviate risk of foreclosure; a maintenance reserve, since the higher turnover of student housing often translates to higher maintenance costs; and strong investor funds/credit.

The trade-off to the higher risk associated with student housing real estate investments is that they can cash flow much better than many traditional investment properties as the combined rental income is often much higher than market rent. 

Commercial units – such as apartment buildings and condos – are more likely to be viewed as wise investments for more experienced investors, because they can be rented to different types of tenants, not just students. Although, where students are concerned, you can rent out a three bedroom unit per bedroom as you would with a single-family residential rental property. The key here, however, is that lenders can more easily turnover an apartment that goes into foreclosure because the separate units and structure as a whole likely haven’t been adjusted to accommodate multiple tenants – i.e., extra bedrooms constructed by adding walls and hallways. Keep in mind that, on average, commercial mortgage financing costs about one per cent to two per cent more than a residential mortgage. That said, commercial buildings with self contained units will also pull in a lot more rental income.

Working with a mortgage broker who is experienced with obtaining financing for student housing investments can also go a long way in helping you receive a mortgage for your investments.

Finding a lender
Local credit unions and non-bank lenders are most likely to have an appetite for financing student housing investments – both residential and commercial. Non-bank lender First National Financial LP, for instance, will finance a commercial building (five or more units is considered commercial) for student housing purposes, but will discount the rent to market rates, since student housing tends to generate higher rent, says Barry Gidney, director of commercial mortgages at First National. If, for example, a building housed 40 units that each contained three bedrooms, each unit could generate $600 per room X 3 = $1,800. If, however, this same unit was rented out to a single family, the market rent would probably only be about $1,000 to $1,200 depending on the location of the building. The reason they discount the rent is to ensure the debt will be serviced by an investor even if the building has a higher vacancy rate at any given time.

First National would also take higher maintenance costs into consideration when financing a commercial student housing unit due to higher turnover and the fact that students are living there without supervision, which adds to the risk, he adds.

The investor must be experienced, have a high maintenance reserve, and ensure the building is safely constructed in order to be considered for financing, says Gidney. Even then, it’s not very often that lenders will reach beyond 75 per cent LTV for this type of venture. Because student housing is such a necessity in many cities across the country, Gidney believes politicians need to be lobbied in order to push CMHC to insure more of these commercial student housing investments. If the deal is not insured – also known as a conventional deal – investors are looking at only obtaining financing ranging from 40 per cent to 50 per cent LTV.

Up until about two years ago, CMHC’s guidelines were much more flexible when it came to student housing, and Gidney believes they could be loosened a bit to make room for experienced investors who can service the debt, and provide much-needed accommodations to student populations. The reason credit unions are willing to look at financing for student housing is that they have the local knowledge to understand the area, which can more easily set their minds at ease when it comes to risk.

If you would like to learn more about real estate investing please give me a call: Kris Krawiec Mortgage Agent 416-845-3745

How to Pay Off Your Mortgage Faster

General Kris Krawiec 4 Feb

You don’t have to paint your house into a rainbow colored billboard to cope with mortgage payments. There are many other ways you can pay off your mortgage faster, though not completely free, that we are going over today for all of our North American readers. In Canada the average mortgage has an amortization period of 25-35 years (roughly the same in the US) but using these tips below will help you accelerate your road to being mortgage free:

  • One tip from Bankrate.com is to add surplus payment whenever you can to the principal. Adding even what may seem like a small amount to your principal will help shorten the length of your loan and also reduce the amount of interest you have to pay. Rounding your monthly payments up slightly to the nearest ten or hundred dollars will help you find savings too.
    Although the extra few dollars may not seem much an extra $6 per month on a $200,000 30 year loan can save you 4 payments!
  • As a mortgage expert at Dominion Lending Centres I often explain that making mortgage payments each week or bi-weekly will lower your interest paid over the term of your mortgage and may even total the same amount of money as a month’s payment at the end of the year. Paying your mortgage in this way can take your mortgage from 25 years down to approximately 21.
  • While we all like getting raises – and spending the money from our raises on commodities, you could put that extra income into your mortgage and the best of all? You won’t need to change your spending habits!
Call me to discuss your savings and how to implement these small changes.
 
Kris Krawiec Mortgage Broker
416-845-3745

BOC Decrease & What That Means For Your Mortgage

General Kris Krawiec 4 Feb

On the heels of headlines forecasting ‘inevitable interest rate hikes’ came (from left field for many journalists, less so for many Mortgage Brokers) the announcement of a 0.25% rate reduction to the Bank of Canada’s overnight lending rate.

The majority of Mortgage Brokers found themselves spending the first two work weeks of 2015 calming clients in the face of multiple headlines forecasting interest rate ‘shocks’ ahead. In turn, the past two weeks were spent explaining to variable-rate clients the subtle, yet important difference between the bank of Canada’s Prime rate and their mortgage lenders’ ‘Prime’ rate.

Lenders base variable-rate mortgages on what is referred to as their own internal Prime rate. Although historically lenders have moved in lockstep with the Bank of Canada decisions, there was some initial reticence to lower effective interest rates on current variable-rate mortgages and after nearly a week without movement Lenders reduced their internal Prime rate from 3.00 to 2.85% sharing some of the Bank of Canada’s reduction with variable rate mortgage and line of credit holders, but not all of the rate reduction.

One important point is that the Bank of Canada’s Prime rate is specifically NOT used to qualify clients for mortgages. In other words, Canadians do not currently qualify for any more mortgage debt today than they did the day before the rate reduction announcement. Accordingly this reduction in interest rates does not directly strengthen purchasing power for home buyers, and thus should do little to add more fuel to real estate values.

It is further worth noting that, historically, as lenders reduce their own Prime lending rate on variable-rate products, the discounts offered on these products—mortgages, lines of credit, etc.—tend to be adjusted upward, negating any potential gains for new mortgage applicants. Existing closed variable-rate discounts will of course continue to be honoured until the end of the client’s mortgage term.

In short, although this rate reduction may bode well for clients currently in a variable-rate mortgage, it may not be of significant net benefit for clients applying for a variable-rate product in the coming weeks. Although today we have both deep discounts on variable rate products, and the new lower 2.85% Lender Prime rate. New applicants may have their cake and eat it too.

Fixed rates, although largely dictated by the bond market, have been edging downward since Jan 5. Despite this material and documented decline, there had not been a major headline noting this. Rather headlines were largely promoting the opposite of what was occurring in reality. The day that the Bank of Canada announced the cut of 0.25%, the bond market saw a (then) record low of 0.83% and has since dipped below 0.60%.

This has created significant increases in lenders’ fixed-rate profit margins, and arguably calls for further rate reductions to fixed-rate products, in particular the five-year fixed-rate mortgage. However, as with the cut to Prime, lenders have thus far been slow to respond. Offering 0.05% and 0.010% reductions and reaping the increased profits. Lenders remain unlikely to make any significant moves until one breaks ranks. With strong property values coupled with strong sales activity in most major markets, there seems little incentive—or fundamental desire—on the part of lenders to reduce rates further.

What is evident at this time is that variable-rate clients will continue to be the big winners into the foreseeable future, and those clients who prefer a fixed-rate product will also continue to benefit from historic lows as well. It should be a very busy Spring market!

Kris Krawiec Mortgage Broker

416-845-3745

Property Assesments As A Measure Of Value

General Kris Krawiec 4 Feb

When homeowners receive provincial Property Assessment notices, some will smile and have a bit more spring in their step, feeling the assessed value is accurate or perhaps even overly positive. Others will wilt and lament a modest gain or even a decrease in the assessed value over the previous year or period. Reactions will of course vary factoring in the potential increase in property taxes that tends to come along with stronger assessments. The reality, setting aside taxation concerns, is that neither parties’ emotions should be tied to the ‘value’ printed on these notices.

A provincial property assessment is an approximate value based on the (broadly) estimated market value as of the previous years. There is a lag time between the estimation of valuation and delivery of the envelope. It also fails to involve a formal site visit or viewing of the inside of the home to consider either significant upgrades or significant deterioration. To put this in perspective, few lenders will work with a detailed official appraisal report that is even 90 days old. Most prefer a report completed with 30 days, as markets can move significantly month over month.

For these reasons, among others, a provincial property assessment should not be relied upon as a totally concrete indicator of value for the purposes of either purchase, sale, or financing.

Always enlist a licensed professional, or perhaps even two or three, in order to get a timely and detailed appraisal of current market value. This will provide a much more accurate reflection of current market values reflecting recent comparable sales, value for zoning, renovations and/or other unique features to the property.  An appraiser is an educated, licensed, and heavily regulated third party offering an unbiased valuation of the property in question.

Think of your provincial property assessment as something akin to a weather forecast spanning far larger and more diverse areas than the unique ecosystem that is your neighbourhood, street, and specific property.

The forecast may call for rain in your city, yet you might have a ray of sunshine radiating upon your street specifically.

Kris Krawiec Mortgage Broker

416-845-3745