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The-Mortgage-Gal

Buying rental properties

Over the last few weeks I’ve worked with several clients who are building their portfolio of rental properties.

Three of the mortgage applications went smoothly, while the other two were a little more challenging.

Each lender has slightly different policies and procedures for evaluating mortgage applications. An important starting point is:

  • the client’s overall financial situation
  • income
  • credit score.

Credit score can make or break an otherwise strong application.

When we get into applications with multiple rental properties, most lenders use a rental worksheet to determine how well an application debt services.

Very simply, debt service refers to the amount of money required over a period of time to repay debts. For rental properties, this calculation includes:

  • mortgage payments
  • property tax
  • allowance for vacancy
  • allowances for insurance and maintenance.

Some lenders use a simpler calculation. They factor in the full mortgage payment and allow a percentage of the rental income (often 50 per cent) but don’t factor in the additional allowances like vacancy, insurance, and maintenance.

One mortgage product that some investors use to purchase rental properties is a hybrid mortgage featuring both an amortizing portion (paying off steadily over time) and a credit line component.

Let’s say you have $250,000 for your down payment on a $500,000 rental property.

To purchase a rental property you need a minimum of 20 per cent down (in this case $100,000). In this example, you could choose a mortgage of $250,000 and add a credit line of $150,000.

The intent behind adding the credit line would be to have easy access to your equity in case you wanted to buy another property.

In the past this has worked well for investors.

Over the last few months, I’ve seen a number of lenders adding in a payment for the credit line as well. They are using a payment, calculated over 25 years at the Bank of Canada Benchmark rate (currently 5.34 per cent), based on the approved limit as opposed to what is actually outstanding.

The intent is to prevent clients from becoming over-extended and unable to meet their financial obligations. The lower your total mortgage exposure, the stronger your application.

The other thing I am seeing is lenders becoming more cautious when approving mortgages for clients with multiple rental properties. Depending on the client’s financial position, the tipping point seems to be about four rentals.

There are some lenders who are not concerned with how many rentals a client has, while others set a cap (often four properties). In some cases, after four properties it makes sense to then find commercial financing.

Commercial lending is a different option all together.

While still considering the overall strength of the application, on the commercial side there is a stronger focus on the property being purchased.

Commercial applications are handled a bit differently. I am seeing more investors move to the commercial side as residential lenders tighten their guidelines.

This information only hits a few of the important points of financing rental properties. Each client and each purchase is different, so it is really important to connect with your mortgage broker or banker before you write an offer to purchase.

What might have been a slam-dunk for you two years ago before the mortgage rules changed might be impossible to finance now. Having your mortgage professional run the figures before moving forward can save a lot of stress once an offer is in play.



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Exemptions from Spec Tax

The Speculation and Vacancy Tax is front and centre again.

The prominent theme has been around the importance of completing the declaration to exempt yourself from the tax (if applicable).

I’ve also had calls from several people about the assessed values on their second homes.

The information I am relying on comes from the Government of B.C.’s website.

If you owned a home in one of the areas subject to the speculation tax as of Dec.31, 2018, you must complete and submit a form to claim your exemption no later than March 31, or the province will bill you for the spec tax.

People who own residential property within designated taxable regions of B.C. may be eligible for an exemption from the speculation and vacancy tax. 

The speculation and vacancy tax is designed to prevent housing speculation, turn empty homes into good housing for British Columbians, and raise revenue that will go to supporting affordable housing.

Exemptions are available, ensuring that more than 99 per cent of British Columbians are exempt.

If you are not exempt from paying the spec tax, it is important to know that any amounts owing are due and payable July 2. If you do not complete the exemption declaration, you will be billed for the tax.

The province will have a process for correcting this if you are billed for the tax, but should be exempt. Speculation (pun intended) on my part is that for this first year, it will take a while to get errors sorted out in July, so taking the time to fill out the exemption declaration may save you a fair amount of pain and aggravation down the road.

While researching available information, I couldn’t find if the spec tax will be collected with your regular property taxes. My thinking is that when you get your property tax notice in May/June, that it will include the spec tax amount.

The website goes into great detail about all of the exemptions available. It is important to know that if you co-own a property in one of the affected areas each owner fills out a separate declaration.

From the provincial site, here is a breakdown of the exemptions available for individuals:

  • Principal residence exemptions
  • Occupied by a tenant
  • Can’t live in the residence because it’s uninhabitable
  • Secondary residence close to medical treatment facility
  • Just bought or inherited the property
  • Separation or divorce
  • Bankruptcy
  • Recent death of owner
  • Property is in a trust created by a will for a minor
  • Property has rental restrictions
  • Property is a strata hotel
  • Property includes a licensed child daycare
  • No residence on the property
  • Other exclusions from the tax

One concern I have is that people who have their property taxes paid by their mortgage lender may be caught unawares.  Ideally people are opening and responding to incoming mail, but not everyone does.

If you don’t complete the declaration form, you might be in for a nasty surprise in August or September when your lender adjusts the property tax portion of your mortgage payment.

In a nutshell, lenders communicate with the local government office to determine how much you owe for your property taxes each year. At the beginning of July, your lender transfers funds to the city to pay your property taxes.

Your lender will compare how much they paid to the city against how much they collected from you over the year.

They will adjust the tax portion of your mortgage payment; if they didn’t collect enough the previous year your payment will increase a little. If they over-collected your payment will decrease accordingly.

If you do not claim your exemption for the spec tax, you could potentially see your mortgage payment increase by several hundred dollars to account for the new tax. You might not realize this, or you may find out the hard way if you don’t have sufficient money in your account to cover the increased payment.

For people that will not be exempt from the tax, it is important to take a look at your BC Assessment to see if it represents the accurate value of your property. Over the last two years (in Kelowna) many of the  assessed values have been a pretty accurate representation of market value.

This week, I saw an assessment on a condo that had jumped to $424,000. The assessment last year was $339,000. The owners of the unit are residents of another country and will be subject to the spec tax.

We looked at the Sample Sold Properties section on Evalue for their condo, and the highest price for a similar unit in the same complex sold last year was $364,000.

The Sample Sold Properties tab is just above the map, about 2/3 of the way down the page, when you search your property address on the Evalue link. BC Assessment does a great job of posting recent sales.

These clients will be hiring an appraiser and appealing their assessed value.

We are learning about the spec tax as information is released. Key takeaways:

  • If you are exempt from the tax, it is crucial that you take a few minutes to complete the declaration to save yourself frustration down the road.
  • If you are subject to the tax, take a minute to review your assessment to confirm the value is consistent with current market values for your property.

It will be interesting to see how the spec tax affects our housing market and our economy.



Beware of credit vandals

Have you seen the movie Identity Thief?

The trailer is possibly one of my favourite movie scenes ever (Melissa McCarthy singing in the car). The movie is pretty cheesy, but the message sure hits close to home.

When I take a mortgage application I usually have a pretty good idea what the clients’ credit scores will be.

I started working with a couple (lets call them Bob and Lynda) in Langley mid November. When I pulled their credit reports I was shocked to see that her score was 623.

I had expected it would be in the high 700s.

For perspective, 680 (or higher) is the score that mortgage insurers and lenders are looking for. The lender I was wanting to work with for this couple would only consider scores 650 or higher.

This was a hard stop.

I called the clients. We went over her credit report item by item.

It turned out that there were multiple applications for credit starting in August. There was a new cellphone showing three months in arrears, and a new credit card that was showing two months in arrears and over limit.

There was also a flag on Lynda’s credit bureau that clearly stated her credit had been compromised in the past, and before any new credit was approved lenders needed to call her cell directly to confirm it was a legitimate application.

Lynda was far calmer about it than I expected. She told me the story of what happened when her identity was stolen the first time. It was a nightmare, but it did get sorted out.

At the time, she had searched the new address on the fraudulent credit and discovered numerous complaints by other victims about the same address. It seemed like home base for a very busy group of criminals.

Second time around, Lynda contacted the cell provider and the credit card company right away. Both issues were dealt with promptly and notes were made on her credit bureau.

I pulled her credit bureau again early this week and her score had jumped to 792. Although frustrating, at least she was able to sort this out quickly.

This experience was unsettling for me. I’ve known Bob and Lynda for many years, and they have always been careful with their finances and personal information.

The start of a new year is a great time to do a thorough review of your financial situation. Take some time to look over your budget and plans.

Book time with a financial adviser to either review your investments or talk about how you can start a savings plan.

Review your mortgage and think about ways to pay it off sooner.

I also suggest you take a few minutes to pull your credit report and go over it to make sure everything is OK.

Based on Lynda’s experience, if your credit has been compromised in the past, I suggest you check your credit every three or four months, or right away if you receive calls from lenders that someone has made an application in your name.

Taking the time to review your credit history may save you time and aggravation down the road when you apply for credit.

For the link to check out your credit score, as well as tips for improving your credit, check out our article Improving Your Credit Score 

Happy New Year!



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Take charge of mortgage

A friend just sent me a screen shot in Messenger. It took me a minute to figure out what it was.

The screen shot was a transaction list of her mortgage payments.

Early in the spring, she told me her goal was to get her mortgage balance under $100,000 by the end of the year. The screen shot finished with her most recent payment, which brought her mortgage balance under the magic number.

When she first shared her goal, we sat down over a coffee and played with some numbers. I ran scenarios so she could see what would happen if she increased her payment every month as compared to if she made lump sum payments.

We had a conversation about how she handles her finances. She felt that she would be more successful making extra payments if she increased her payment amount. This way, she would be obligated to make the higher payments.

People handle their finances differently. Income varies from industry to industry. Expenses can vary over the course of the year.

Most mortgages offer several pre-payment options (without penalty) to allow you to pay off your mortgage ahead of the scheduled amortization. Pre-payment options can include lump sum payments, double-up payments, or a combination of the two.

For a quick overview of pre-payment options, read How Do I Pay My Mortgage Off Sooner? 

If you are thinking that you would like to tackle your mortgage balance a little more aggressively, there are a few steps I recommend.

  • Take a look at how you have spent your money over the last few months.
  • Are you able to save money from month to month?
  • Is your savings account balance growing steadily, staying the same, or decreasing month over month?
  • Do you have lump sums coming to you (ie: annual bonus)?
  • Does your income vary or is it consistent every month? Have you had a significant increase in income?
  • Do you have the opportunity to take on extra work to increase your pay?

If your income has increased and you are saving money, it may be a great time to make extra payments on your mortgage. If you have extra money coming throughout the year, it might be smarter to make lump sum payments when the money arrives as opposed to making higher payments each month.

Using a mortgage balance of $350,000 and rate of 3.29 per cent, your initial payment would be $1708. If you increased your monthly payment by $100, you would pay your mortgage off 2 1/2 years sooner.

An increase of $100 a month may seem a little daunting. How about starting by increasing your monthly payment by $25 the first year? You will adjust your budget — maybe fewer coffees out.

Most likely you won’t even feel the increased payment.

Take stock after a few months or a year and make another small increase. It may not seem like much, but over the amortization of your mortgage small changes will add up to big interest savings for you.

Another way you can accomplish this is to switch from monthly payments to accelerated weekly or bi-weekly payments. The accelerated payment frequencies are calculated a little differently to pay more against your principal every payment.

Again using $350,000 at 3.29 per cent, your regular bi-weekly payment would be $788.13.

The accelerated bi-weekly payment would be $854.44. This is a difference of $66.31 every two weeks.

By choosing the accelerated payment, at the end of your first five-year mortgage term you would have 17 years remaining as compared to 20 years with a monthly or regular bi-weekly payment.

So where does the take charge of your mortgage part come in?

Many lenders have Customer Portals that allow you to sign in and play with calculators to see how extra payments will affect your mortgage balance and remaining amortization.

Some of these portals also allow you to make additional payments yourself without having to call the lender or go in to a branch.

If your lender doesn’t offer a customer portal for you to manage your mortgage yourself, setting an annual appointment with your lender to review your mortgage is a wise idea. Another time to do this is when your mortgage comes up for renewal.

OK, that’s enough heavy stuff.

Wishing you and your loved ones a wonderful holiday season filled with much love and laughter, and safe travels if you are heading away for the holidays. I’m looking forward to time spent with family.

Cheers!



More The Mortgage Gal articles

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About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order 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 their 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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