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The-Mortgage-Gal

Borrowers frustrated

The sky is falling, the sky is falling …. 

For many of us, changes to the way we do business tend to instigate a panicked, knee-jerk reaction. 

In October 2017, the Office of the Superintendent of Financial Institutions (OSFI) announced further changes to mortgage lending rules. OFSI’s mandate is to oversee federally registered banks and insurers, ultimately contributing to the stability of the Canadian financial industry.

There has certainly been a significant amount of buzz about what these changes mean to potential home owners.

By way of background, in October 2016 OFSI rolled out sweeping changes as to how mortgage borrowers (primarily borrowers putting down less than 20 per cent) qualify for financing.

You have likely heard the term stress test. Other changes came in to effect at the same time that affected the purchase of rental properties, and refinances.  

Most of the changes being rolled out are designed to protect Canadian consumers, which is an important part of the conversations I have been having with my clients during the last year.

In some circumstances, the stricter qualification guidelines have proved frustrating for clients who have had to reconsider their price range, and think about whether now is still the right time to buy.

During the last year, the stress test you have heard about has been applied to people buying homes and putting down less than 20 per cent (for any offers signed Oct. 17, 2016 or later).

These buyers have to qualify at the Bank of Canada Benchmark rate, not the actual interest rate they will be paying on their new mortgage.

Currently, the Benchmark rate is 4.99 per cent. Five-year fixed mortgage rates (for high-ratio purchases) are sitting around 2.99 per cent.

Using a family income of $75,000, allowing for property taxes and heating costs and assuming no other consumer debt, under the old rules you would qualify for a mortgage of about $347,000.

With the new rules, making the same assumptions, you would only qualify to borrow about $282,000.

The math behind this means that buying power for clients putting down less than 20 per cent has decreased by about 20 per cent.  

As a result of the changes to rentals and refinances, mortgage lenders that previously offered very competitive rates (because they had access to mortgage default insurance for these files) have increased their rates to account for the (theoretical) increased risk associated with these mortgages.

Effective Jan. 1, 2018, the stress test will be applied to all people seeking mortgage financing from a federally regulated financial institution, regardless of the size of their down payment.

At this time, it does not appear that this same rule will be applied to clients (putting down 20 per cent or more) and working with a provincially regulated institution (i.e.: credit unions).

I was asked the other day about the potential consequences of the latest round of changes. There are a few that came to mind, and many others that we will see as time goes on. Reduced buying power will obviously affect many clients who have been considering moving in to larger more expensive properties.

People trying to get in to the housing market may find they need to wait a little longer, or require a co-signer in order to qualify if the inventory of starter homes decreases as people can’t afford to upgrade.

Clients who qualified at the top end of their buying power during the last few years may find that they have fewer options at renewal time.

Unless they have had salary increases or paid down other consumer debt, they may no longer qualify for the mortgage amount they are carrying and find themselves stuck with whatever rates their current lender offers at renewal.

We may see mortgage lenders opting to offer longer amortizations for clients putting down more than 20 per cent in order to qualify these clients. This workaround, while reducing mortgage payments, will potentially increase the amount of interest clients pay over the life of their mortgage.

More concerning, I suspect we will see a brief flurry of clients writing offers on homes so that they are able to buy before the new qualification rules kick in.

All of this seems doom and gloom, and I do feel we will see some adjustments to the market. However, it is important to remember that there are many options available to mortgage clients.

Although the qualification rules are the same for everyone, each lender has their own policies and procedures for approving mortgages.

It is important to work with a professional who is able to help guide you to the best mortgage for your particular circumstances.

For instance, there are still several lenders that will allow the use of Child Tax Benefits as income for qualification purposes. Some lenders allow higher debt servicing ratios if you have substantial equity in your home.

If you have been pre-qualified for mortgage financing over the last few months, I suggest you connect with your mortgage specialist to ensure you will still qualify for the same price range, and learn how the upcoming changes may affect your personal situation.



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Pay your mortgage sooner

By making thoughtful decisions and small changes, you can reduce the amount of interest you pay on your mortgage and pay it off years sooner.

Work with your mortgage specialist/banker to compare different interest rates, payment schedules, and amortizations to help you decide which options best suit your budget. 

If your plan is to pay down your mortgage as quickly as possible, there are three key areas you can adjust to help achieve this goal.

Amortization

Amortization refers to the gradual repayment of a debt by means of partial payments on the principal at regular intervals. The amortization period is the length of time required to repay your mortgage in full.

The amortization period you choose can have a significant effect on the amount of interest you pay over the life of your mortgage. Consider the following example:

$400,000 mortgage with an interest rate of 2.99 per cent (monthly payments):

  • With a 25-year amortization, the monthly payments are $1,890.93; balance remaining after five years is $341,832.69, 20 years remaining amortization
  • With a 20-year amortization, the monthly payments are $2,212.70; balance remaining after five years is $321,046.17, 15 years remaining amortization

In this example, assuming a constant interest rate over the life of the mortgage, by choosing a 20-year amortization you save yourself about $36,230 and have your mortgage paid off five years sooner.

Have your mortgage specialist prepare comparisons for you to show you the difference a slightly higher payment can make.

Prepayment options

Most lenders offer clients the ability to increase their payments once a year. I generally suggest that my clients choose a 25-year amortization to start, and have them increase the payment after, based on what they feel they can afford.

This way, if the higher payment proves to be more than they are comfortable with they can reduce the payment without having to pay fees to rewrite their mortgage.

As a general rule, the following prepayment provisions are available to you each year of the term of your mortgage, provided your mortgage is in good standing:

  • Increased payment – once per year, you can increase the amount of the regularly scheduled payment to a maximum predetermined by your lender. This amount is generally either 15-20 per cent. The maximum for each payment increase is usually calculated using the amount of the current payment.
  • Lump sum payment – again, this depends on your lender. In many cases you can make lump sum payments of $100 or more on any regularly scheduled payment date, provided the total of these prepayments made throughout the year does not exceed 15-20 per cent (whatever the amount allowed by the lender) of the original principal amount of your mortgage.

Payment schedules

Most lenders offer very flexible payment options. Weekly, bi-weekly, or monthly payments are most common. These choices also have a significant effect on the overall interest payments.

Consider the following example: 

$400,000 mortgage at 2.99 per cent interest over a five-year term, 25-year amortization 

SCHEDULE        PAYMENT           BALANCE (at end of term)       INTEREST SAVINGS (five year term)

Weekly                 $472.73               $331,527.79                                  $850.90

Bi-weekly             $945.47                $331,564.30                                 $813.09

Monthly                $1890.93              $341,527.79

In this example. by choosing either weekly or bi-weekly payments, you will have paid down approximately $10,000 more than if you had chosen monthly payments.

You will likely find it most convenient to choose a payment schedule that follows your pay dates.

As you can see, there are many ways that you can pay your mortgage off ahead of schedule. By working closely with your mortgage professional you can be mortgage-free years sooner. 



Mortgage closing costs

You’ve done your homework:

  • saved your down payment
  • met with your mortgage broker and are pre-approved for a mortgage
  • connected with a reputable realtor
  • chosen a lawyer

You’re off to a great start. You will also be covering a few extra costs when your purchase is finalized. Being prepared for these closing costs in advance avoids last-minute stress.

If you are putting the minimum five per cent required to buy your home, your mortgage professional will explain that you need to have 6.5 per cent on hand to cover your closing costs.

It is a good idea to gather estimates of these fees and expenses so you are fully prepared.

You will normally sit down with your lawyer at least a week before your purchase completes to sign all the required documentation. At that time, you will need to provide a draft or certified cheque to cover the balance of your down payment and closing costs.

The following list covers typical expenses you’ll encounter when your purchase is completed or “closed."

Mortgage default insurance

Mortgage default insurance, commonly referred to as CMHC or Genworth insurance, protects the lender in case the borrower defaults on the mortgage. Mortgage default insurance is required on all mortgages with down payments of less than 20 per cent, which are known as high-ratio mortgages.

Property transfer tax

Some provinces levy this tax whenever real estate changes hands. This tax is calculated as a percentage of the purchase price of your property, so the more expensive the property, the larger the amount of tax paid.

First-time home buyers may be exempt from paying all or part of the property transfer tax. Exemptions are also available on newly-built home purchases. 

In B.C., the tax is charged at a rate of:

  • one per cent on the first $200,000,
  • two per cent on the portion of the fair market value greater than $200,000 and up to and including $2 million, 
  • three per cent on the portion of the fair market value greater than $2 million.

For example, if the fair market value of a property is $450,000, the tax paid is $7,000.

GST

New homes are subject to GST, but used homes are not. There are rebates and exemptions available, so your lawyer will calculate your tax payable. This can be added to your mortgage.

Home insurance

This insurance, especially fire, must take effect from the moment you are the owner of your home. Certain types of properties can be more challenging to insure, so it is a good idea to do some research prior to purchasing a home.

Home insurance typically costs around $1,200 per year, but costs will vary depending on the type and location of the property. This insurance must be renewed annually, and most insurance companies provide the option of monthly payments. 

Home inspection fee

This is a fee payable to an inspector you hire to check out the physical structure and mechanicals of your house before you decide to buy it. Again, it is a good idea to do your research before hiring a home inspector. Your realtor may be able to recommend someone, or you can check with friends or family to see who they have used.

A good home inspector will spend three to four hours going over your home, then spend time with you explaining his/her findings. Inspectors provide a written report documenting any concerns that need to be addressed. You can expect to pay $400-$500 for an inspection.

Appraisal fee

Your lender may require an appraisal to confirm that the property is accurately valued. The cost of the appraisal is sometimes passed on the you. 

Depending on the location and complexity of the property, an appraisal can cost $300-$1,500. Some lenders use an automated system to value the property. In this situation, an independent appraisal is not required.

Survey

A legal survey of your land — its borders, perimeters, house placement, etc. — is sometimes (rarely) required by the lender, and will be performed by a professional surveyor. A typical survey can cost approximately $1,000. More commonly lenders require title insurance instead of a survey.

Title insurance

This covers any number of oddball situations that could threaten the title to your property. Title insurance is mandatory with most lenders and is much less costly than a new survey. Title insurance typically costs about $250, but varies based on your purchase price.

Homebuyers can purchase a personal policy in addition to the policy mandated by the lender. The additional policy covers many unusual circumstances and is relatively inexpensive if the two policies are purchased together. 

Legal fees and disbursement

Ask for a written quote to get a better idea of how much legal fees will be. On a straightforward purchase, legal fees typically run about $1,200-$1,400. Your lawyer will also calculate any money you’ll need to refund to the seller that has already been paid out on your behalf. These adjustments include portions of municipal property taxes for the months you’ll own the home, utility bills paid in advance, etc. 

Your mortgage specialist will give you an overview of what to expect for expenses. Taking some time upfront to gather estimates and knowing what your costs will be at closing goes a long way to reducing stress and anxiety. 



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10 guidelines of financing

You’ve written an offer on a home, and gone through the nail-biting process of being approved for your mortgage.

You’ve jumped through hoops and provided all of the documents necessary to demonstrate that you qualify for your mortgage. You did the happy dance and told everyone you know that you are buying your dream home.

A week before you are supposed to get your keys you find out there’s a problem.

You went shopping for new furniture to put in your home, and your car died unexpectedly. You started a new job with a higher salary. Not a big deal, right? You signed loan documents and were on your way in a new vehicle and your furniture is scheduled to be delivered the day after you get your keys.

What many people don’t realize is that during the mortgage process, significant changes to their finances can affect their approval. Lenders can cancel a mortgage any time before it closes if the client’s situation changes.

This list has been floating around for a long time. I’ve seen it in a few different places under the heading “The Ten Commandments of Buying a Home." It might be more accurately called “Ten Things Not to do Before Your Mortgage is Finalized."

I initially felt it was a bit condescending, but now feel that properly explained these points are important for home buyers to know.

Here is the list, along with a brief explanation of why these points are important:

  • Thou shalt not change jobs, become self-employed, or quit your job. You qualified for your mortgage based on your employment history. If an incredible job offer comes along, hold off until after your mortgage is finalized. Your new job most likely has a probation period which could mean you no longer qualify with your particular lender.
  • Thou shalt not buy a car, truck, or van (or you may end up living in it). In some cases this may not be an issue, but if your new mortgage payment puts you at the top of your debt servicing, an additional payment may make you ineligible for the mortgage you need. A general rule of thumb is that every $500 in loan payments reduces your home buying power by about $100,000. It’s a lot easier to buy a vehicle after you buy a home than the other way around.
  • Thou shalt not use credit cards excessively or let them fall behind. When your application is submitted, a payment of three per cent of the outstanding balance on your credit cards is factored in for qualification purposes. If your mortgage lender checks your credit report shortly before closing, a dramatic increase in balances could affect your approval.
  •  Thou shalt not spend money you have set aside for closing. As part of the approval process you need to demonstrate that you have your down payment set aside, as well as funds to cover your closing costs. About a week before your mortgage finalizes you will need to provide those funds to your lawyer. If you suddenly don’t have the money available, your mortgage may not close as scheduled.
  • Thou shalt not omit debts or liabilities from your mortgage application. Early on in my career I worked with a co-signor that told me his house was mortgage-free. Three days before closing the lender discovered there was a large credit line secured by his house. This meant that we had to re-work the entire application and my clients almost lost out on their purchase.
  • Thou shalt not buy furniture. It's tempting, on the home stretch to owning a new home, to take advantage of offers like zero percent financing or no payments for a year, but if you do and your lender discovers this, a payment needs to be added to your application. Best to wait until you have the keys to go shopping.
  • Thou shalt not let new creditors pull your credit report. Your mortgage lender may be concerned that you have a new payment they are unaware of.
  • Thou shalt not make large deposits without making your mortgage broker aware. Your lender will ask to confirm the source of any large deposits. They need to know that you have not borrowed money (another payment) or that the funds are not from an illegal source.
  • Thou shalt not change bank accounts. Not necessarily a big issue, but it may mean more paperwork required to confirm your down payment is adequate and available.
  • Thou shalt not co-sign a loan for anyone. You may trust the person you are co-signing for completely, but as a co-signor you are legally responsible for any payments due should they not be made. It goes without saying that this could affect your ability to make your mortgage payment.

These points also apply if you have been pre-approved for a mortgage but have not yet made an offer. It’s a good idea to touch base with your mortgage broker (or banker) to let them know you are considering making a change.

They can look at your particular situation and let you know how it might impact your buying power. A five-minute phone call may save you a great deal of stress down the road.



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About the Author

Laurie Baird and Tracy Head are mortgage brokers with Verico Complete Mortgage Services. Together they have over 45 years of experience in the mortgage industry.

As mortgage brokers, Laurie and Tracy spend time getting to know the people they work with and help them understand the mortgage process. They support their clients before, during, and after a home purchase.

Laurie and Tracy are able to offer their clients advice and options. With access to over 40 different lenders, Laurie and Tracy are able to match the needs of their clients with the right mortgage package. They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit:
http://www.okanaganmortgages.com

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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