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The-Mortgage-Gal

Home-buying basics

Mortgage pre-qualification – more important than ever

As we head into the spring market, I think it’s important to revisit the basics of the home-buying process.

Whether you are a first-time home buyer, have purchased a home in the past, or worked with a mortgage professional last fall before the rules changed, I strongly recommend you reconnect with your mortgage professional before you go home shopping.

It is a good idea to meet with your mortgage professional to complete (or review) your application and determine how much you are qualified to borrow under the new guidelines. This will determine the price range you should be considering.

Your mortgage professional will outline how much you need to have on hand to cover your down payment and closing costs.  

To complete an application, you will need to have the following information:

  • personal data such as your legal name, birthdate, and social insurance number
  • home address and employment information
  • a description of your assets that includes what you will use for your down payment
  • a list of your outstanding debts (credit cards, loans, etc).

Your mortgage professional will review your credit report. Your credit report provides a history of how you manage your finances and is a key factor that potential lenders review when considering your application.

You will also be asked for confirmation of the information that you have provided. You will need to provide documentation such as:

  • bank statements
  • tax returns
  • letter from your employer
  • current pay stubs.

It is helpful to start gathering this information ahead of time to avoid last-minute stress.

You will be required to show that you have at least 6.5 per cent of the purchase price of your home set aside to cover your minimum down payment and closing costs.

The minimum down payment required to purchase a primary residence is five per cent (for purchases up to $500,000). Over this amount, the minimum down payment required changes to five per cent up to $500,000 and 10 per cent of the balance over $500,000.

The more you are able to put down toward your purchase, the less interest you will pay over the long term.

If you are putting down less than 20 per cent of the purchase price, lenders require default insurance. You may hear this referred to as CMHC insurance.

The purpose of this insurance is to protect the lender in the event that you default on your mortgage payments. It is a one-time up front cost that can be added to your mortgage.

It is calculated as a percentage of the amount you borrow and is based on a sliding scale – the more you put down, the lower the percentage that is charged. 

In some remote areas, lenders may require default insurance even if you put down more than 20 per cent.

Your down payment ideally comes from your own savings.

If you have invested in RRSPs (provided they are not considered locked in), you may be able to take advantage of the Home Buyers Plan and use them as your down payment.

Your down payment may also come from an immediate family member.

Closing costs include items such as:

  • an appraisal
  • home inspection,
  • title insurance
  • property transfer taxes
  • legal fees.

Depending on your particular circumstances, an appraisal may not always be necessary. As a first-time buyer, you may not have to pay property transfer tax.  

Your mortgage professional can give you an idea of what these costs are in your particular area. It is a good idea to use a checklist to keep track of your estimates for these expenses, to ensure you have enough money set aside to cover them.

Once you have completed an application and demonstrated that you have your down payment, your mortgage professional will submit an application to determine if you are pre-qualified.

You will find out the maximum amount you are qualified for, and most lenders will issue a 120 day rate guarantee. This rate guarantee means that even if rates go up while you are shopping, your mortgage will be at the pre-approved rate provided it closes within the 120 day period.  

It is important to understand that even though you are considered pre-approved for a mortgage, final approval is still subject to the property you buy being considered suitable by the lender.

As well, you must be able to satisfy the lender’s requirements for appropriate documentation.

It is important to consider your lifestyle and spending habits — just because you are pre-approved to a certain amount does not mean it will be comfortable to carry that particular mortgage payment.

Practice making the higher mortgage payment and additional expenses of owning your own home for a few months. This will give you a good idea of whether you want to commit to the maximum amount, or perhaps scale back a little to allow for more discretionary spending.

Knowing the amount you are pre-approved for will help guide your search as you move to the fun part of the process – shopping for your new home.

Make sure you leave room in the budget for snow shovels.



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The best rate is...

“What’s your best rate? I saw on-line that I can get 2.89 per cent for five years.”

Many times this is the first question clients open with. In the past, this was a relatively simple question to answer.

Changes to mortgage rules introduced in October 2016 have made this question far more challenging.

Most news stories and conversations have focused on qualification guidelines, and how the new rules affect clients’ borrowing power.  

One aspect of the changes that has been overlooked is the new definition of which mortgages are considered insurable.

Insurable mortgages are those eligible for default insurance. Default insurance, which is most commonly referred to as CMHC insurance (provided in Canada by CMHC, Genworth, and Canada Guaranty), protects the lender in case the mortgage goes in to foreclosure.

With the changes introduced in October 2016, the definition of which mortgages are insurable changed.

At this time, rental properties are no longer considered insurable. Refinances are no longer insurable.

How does this tie in to the best-rate question?

Prior to October 2016, I had two rate sheets to reference: 

  • one sheet for high-ratio (insured with less than 20 per cent down payment) mortgages
  • a second sheet for conventional mortgages (20 per cent or more down payment).

Today, I have three categories of rates. I have six rate sheets of lenders and rate categories to go through to find a suitable fit, depending on the client’s situation.

Lenders offer different rates for insured mortgages, insurable mortgages, and for rentals and refinances.

To add to this complexity, many lenders are offering a tiered rate structure within the insurable and rental/refinance rate brackets, depending on how much equity the client will have in the property.

Before I even consider quoting a rate, I need to ask my client a series of questions. This can be frustrating for clients who haven’t been through a mortgage application in the last few years.

Because rental properties and refinances are no longer insurable, there is greater risk to the lenders in the event that things go sideways with the mortgage. In most cases, these rates are now priced slightly higher to help mitigate that risk.

Most challenging to explain to clients is that when they are putting 20 per cent or more down, their rates are slightly higher than those offered to clients who have to pay mandatory default insurance.

It seems counter-intuitive to think that people putting more money down have to pay a higher interest rate than clients making a minimum down payment.

Making it even more complex, some lenders no longer offer certain mortgage products. For instance, trying to find a competitive rate for clients looking to refinance a rental property last week proved to be very challenging.

Their current mortgage holder no longer offers mortgages on rental properties, which means they will have to pay a penalty to move to a new lender that does offer refinances on rentals.

Finding a low rate is obviously important. With the changing mortgage environment it is more important than ever to understand the fine print of different mortgage products. 

When you are looking for a new mortgage, as important as the rate question are the following:

  • What are the prepayment privileges?
  • Is this mortgage portable?
  • Is this mortgage assumable?
  • How does this lender calculate early payout penalties?

As we move forward and adjust to the new mortgage guidelines, lenders are fine-tuning their products to remain competitive and offer clients a wide range of options.

Your mortgage professional will be able to offer you advice and guidance as to the best fit for your situation.



New rules in effect

And so it begins.

I attended the Penticton Chamber of Commerce Town Hall meeting on Wednesday where MP Dan Albas was the keynote speaker.

Topics were the recent mortgage rule changes, and changes to small business taxation.

Albas has been vocal about anticipated effects of the changes, so I was interested to hear his take on the new rules. He shared his thoughts as to some of the possible challenges homeowners may face under the new qualification rules.

The discussion that followed was interesting. My feeling was that most of the people in the room were concerned about some of the unintended consequences of the rule changes.

One contentious topic was mortgage renewals. My interpretation is that many Canadians now have fewer options at renewal.

If people bought at the top end of their price range, if their employment or income has since changed, or if they have taken on new debt, they may not have the flexibility to rate shop at renewal time.

If their mortgage is coming up for renewal this year, it means they originally qualified at a rate lower than three per cent. If they are now considering options at other financial institutions, they will have to qualify at a rate of 4.99 per cent, or possibly even higher depending on their chosen rate.

One person in the room didn’t see this as a problem. As long as a client renews with their existing lender they don’t have to requalify. 

At least, this is the current way of doing business.

Renewing with the existing lender is generally simple — usually one signature and the client is good to go for another five years.

Switching involves completing a new application, gathering and providing documentation, and the angst of waiting to find out if a new mortgage is approved.

Switching creates a competitive rate environment. Switching affords clients options.

When clients call me to discuss switching their mortgage at renewal, the first question I ask is what rate their lender is offering. I review their situation and talk about rates and packages I can find for them.

If the rates I find are lower, I suggest that they call their lender back to see if they will match or beat the rate I quote. Before I waste a client’s time, I like to make sure I have a better option.

This may seem counter-intuitive. As a broker, I would, of course, like the business. However, many times once the current lender knows the client may switch out they offer a lower rate.

How do I see this changing?

I wonder how long it will take for financial institutions to implement a new process at renewal. For instance, will they ask clients for updated information? Pull credit reports to consider the client’s overall financial picture?

And if this review shows the clients won’t qualify at another lender, will they still be offered competitive rates?

I have been through rule changes many times. The initial reaction tends to be the same. There is a lot of frustration and fatalistic thinking, then mortgage providers and clients adapt and move on. Over the last year, we have adjusted to the initial stress test. 

If your mortgage is coming up for renewal in the next few months, it is a great idea to do your homework sooner rather than later.

Whether you are thinking of listing your home for sale and moving, or keeping your mortgage essentially the same, my recommendation is that you first touch base with your banker or mortgage broker to see how the new mortgage qualifications affect your particular situation.





Mortgages and assessments

Assessment versus mortgage rules

For the past 2 1/2 months the focus has been on upcoming mortgage rule changes, and how these changes will affect clients. 

Last week, the rubber hit the road.

What else happened last week? People across the province opened their mail and found their 2018 property assessments. 

Last fall, BC Assessment sent letters to thousands of homeowners advising that they would be seeing a larger than normal increase in assessed value.  According to a CBC article I read, those letters were issued to people whose assessment were increasing by 30 per cent or more.

I checked mine on the BC Assessment site. I was surprised to see my assessment increased by almost 20 per cent.

My initial response was mixed. Who doesn’t like to see that their home is worth more? However, being as our property tax bills are based on our assessed values, my mind starting calculating a proportionate increase in my property tax bill. 

My first thought was that I needed to appeal my assessment. How on earth could they justify a 20 per cent increase??

I scrolled down the page (at least halfway down), I found a tab marked Sample Sold Properties. By clicking on that tab, I found an extensive list of similar houses that sold in West Kelowna over the last year.

Based on the list of comparable sales, the new assessed value on my home is certainly in the ballpark of what I would list it for if I were planning to sell.

If you are considering appealing your assessment, I suggest you take a minute to look at the Sample Sold Properties tab for your own property. If the houses that come up were sold at prices similar to your assessment, and the homes are similar in size and area to your home, my guess is you won’t be very successful with your appeal.

If your increase seems odd or disproportionate compared to the homes you see listed, your best bet is to pick up the phone and call BC Assessment to discuss your new assessment.

How does this tie in to the mortgage world?

Over the last week, I had conversations every day with clients who called asking if they could now refinance their homes being as their property was worth so much more.

Lenders require appraisals for refinance applications. Appraised value and assessed value are (generally) not the same. Over the last year I saw appraisals on homes come in at well over their assessed value.

For a refinance, the maximum we can take the mortgage to is 80 per cent of the appraised value. When I am working with a client on a refinance, one of my first steps is to check the assessed value to see if we are in the ballpark.

Even if the assessed value seems low, with my knowledge of what homes are selling for, I usually have a sense of whether the value is there to move forward (or not).

The new assessments and lists of comparable sales are a great starting place for determining the true value of homes in the area. Had you asked me the same question based on last year's assessed values, my answer would have been different.

Clients choose to refinance their homes for many different reasons. Whether or not refinancing is a good idea is a highly individualized question, and is a topic for another day.

The next piece of the puzzle is to figure out whether clients qualify to carry a larger mortgage. With the changes that kicked in Jan. 1, clients now qualify for about 20 per cent less than they did previously.

It will be interesting to see how many clients are negatively affected moving forward.



More The Mortgage Gal articles

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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