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The-Mortgage-Gal

Social media, your mortgage

Theme of the week: provide accurate information to your mortgage broker (or banker).

I am fortunate because my clients are very comfortable talking to me.

I’ve raised three kids, so sometimes my keenly developed spidey-sense goes into over-drive when I feel I’m not getting the whole story.

When I take an application from a client, I do background research to confirm what they are telling me is accurate. I gather documentation to demonstrate income and down payment.

I also look to see that there are no skeletons in the closet.

With technology today, information is readily available about many aspects of our lives. Sometimes more information than is helpful.

Two years ago I was working with clients up north.  Their’s was a beautiful application – clean credit, both had been with their respective employers for almost ten years, and their down payment was coming from the sale of their current home.

As a broker, I was thrilled. We had an approval immediately, all conditions signed off, and the lender sent mortgage instructions to the lawyer.

One week, one week! before closing, I had a panicked call from the lawyer who the lender had cancelled the mortgage commitment. While I was still trying to wrap my head around this, the lender’s number came up on my call display.

Apparently, while they were doing a final review and sign off, the lender came across court records from 1997 (almost twenty years prior) that showed the wife had been charged with a criminal act.

The wife was never convicted and the charges were dropped.

Regardless, the lender was concerned enough that they cancelled the financing that had been approved and ready to go for over a month.

  • Was the wife currently involved in illegal activities?
  • Was this a fair action on the part of the lender?
  • Should she be penalized for things that happened 20 years ago?

From my perspective (and theirs obviously), the answer was no.

I’ve heard stories from other brokers about similar situations. In one situation, clients were in the process of refinancing their home. When the appraisal was reviewed by the lender, they noticed pot plants growing in the garden.

 As the story goes, the client had posted pictures all over Facebook that showed a lavish life style and a great deal of partying. My guess is the lender had concerns that the client might end up in trouble.

Financing was cancelled by this lender as well.

I’ve heard of situations where clients purchased a new vehicle or furniture the week or two before their mortgage was supposed to finalize.

In some of these cases the clients found themselves in a pickle because the lender did a quick review and discovered that debt servicing didn’t work with the new payments included.

Many people don’t realize that lenders may do a final review shortly before the closing date. This could include pulling an updated credit report.

If you are in the process of buying a new home or re-financing your current home, its important to remember that your application has been approved based on what you told your mortgage broker initially.

Should you be thinking of making any significant changes to your situation, it is critical that you advise your mortgage broker before you do.

For instance, let’s say that you wrote an offer to purchase with a closing date in December. A month before it closes, you are offered a better job with a large increase in pay.

It would make sense to change jobs because, after all, you will be making more money and are therefore better able to pay your mortgage.

However, this could potentially jeopardize your mortgage approval.

My understanding is that in B.C., there is a mandatory three-month probation period with a new employer. Your lender approved your mortgage based on your employment history. Presumably you were already through a probation period at your current job.

This could raise flags. If you are changing industries, the lender might be concerned about your stability. If you are staying within the same industry, the lender may be completely fine with the change.

The important message is that you keep your mortgage broker in the loop so that they can make sure you are not risking your financing.

The fine-print of mortgage approvals includes wording such that should the lender learn about material changes to your circumstances they are able to cancel your approval. This is not a situation you ever want to find yourself in a week before closing.

Be upfront with your mortgage broker about your circumstances, and if you are considering making a change let them know as soon as possible. Most situations can be managed ahead of time to avoid uncomfortable surprises prior to closing.



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Pay mortgage off sooner

During the last few weeks, I’ve worked with clients who expect changes to their finances in the next few months.

One couple purchased a home and have a rental property listed for sale. Their dream home came on the market and they were able to forward before selling the rental. When the rental property sells, they will have a significant amount of money to put toward their new mortgage.

Another family will be going from one full-time income to two when the husband finishes his schooling at the end of December. They really want to pay as much of their mortgage off as they can before they start a family.

By making thoughtful decisions and small changes, it is possible to reduce the amount of interest that you pay over the life of your mortgage. Comparing different interest rates, payment schedules, and amortizations may help save you thousands, and shave years off your mortgage.

If your goal is to pay down your mortgage as quickly as possible, it’s important to know the prepayment options allowed by your lender.

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 time required to repay your mortgage completely.

The amortization period you choose can have a dramatic effect on the amount of interest you pay over the length of the mortgage. Consider this example:*

$400,000 mortgage with an interest rate of 3.34 per cent*

  • With a 25-year amortization the monthly payments are only $1,963.45
  • With a 20-year amortization the monthly payments are increased by only $318.95 to $2,282.40.

In this example, by choosing a 20-year amortization, you save yourself almost $42,000 and your mortgage is paid off five years sooner.

Although a 25-year amortization is the norm, 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 payment once a year. I generally suggest that my clients choose a 25-year amortization to start with, and have them increase the payment after based on what they feel comfortable with.

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 re-write the mortgage.

As a general rule, the following prepayment provisions are available to you each year of the term of your mortgage (i.e. during the 12-month period starting from the date your mortgage is advanced, and then once each year):

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

Payment schedules

Most mortgages have very flexible payment alternatives. Weekly, bi-weekly, or monthly payments are most common. These choices also have a great effect on the overall interest payments. Consider the following example*: 

$400,000 mortgage at 3.34 per cent interest over a 5-year term 25 yr. amortization 

SCHEDULE                  PAYMENT          BALANCE (at end of term)   INTEREST SAVINGS (over amortization)

Accelerated weekly       $490.86                    $333,293.85                                    $24,647.23

Accelerated bi-weekly    $981.72                   $333,338.04                                     $24,382.00

Monthly                          $1,963.45                 $344,102.73

*The example assumes the interest rate will remain constant through the whole amortization period.

By choosing a payment schedule other than monthly, you can save a great deal of money over the life of your mortgage. As well, you will likely find it most convenient to choose the payment schedule that follows your pay day.

If you are unclear about the prepayment options for your mortgage, ask for clarification. I was going over options with a client last week. She is down-sizing and her goal is to be mortgage-free within five years. 

She is very savvy and careful with her money. She was surprised to learn that she could make lump sum payments every year. She thought that she could only do a lump sum payment once each term (ie: once every five years).

I suggest clients do an annual check up of their financial situation and take a look at their family budget to see if there is an opportunity to pay down their mortgage quicker.

In our market this is not always practical, but life changes such as wage increases or not having to pay daycare bills can free up a little extra cash that can make a big difference to your bottom line.

There are many ways that you can pay your mortgage off ahead of schedule. By working closely with your mortgage specialist you can be mortgage-free years sooner.



Know thy neighbour

One night last week, my neighbour and I were wrenching on my daughter’s car. In fairness, mostly he was wrenching and I was handing him tools and learning introductory mechanics.

He asked what I was writing my column about this week.

I looked at him and asked, “any suggestions?” 

"The value of good neighbours," he said.

We both laughed. He is seriously the best that anyone could hope for.

That thought didn’t leave my head though.

The next day, I spoke with Greg, one of my clients who had purchased a home a few months before. He initially wavered a little about the home as he was unsure of the neighbourhood.

To put this in context, Greg was downsizing from a lovely home in an upscale area of Kelowna and buying in a much lower price range in a completely different area of the city.

This will be his retirement home, and the goal was to be able to head south for a few months each winter.

He’d been looking for the right home for a few months and had a very specific list of features he wanted, including a suite.

As soon as Greg walked into this house, he immediately felt that it was the right home. There were a few renovations he wanted to do, but otherwise it met all the criteria on his list.

The night he wrote the offer he cruised by the house again. He noticed that there were several homes on the street for sale. And two homes on the street with driveways full of *ahem* stuff.

He felt a bit unsettled as he drove away.

After thinking on it a little that night, he decided to go look at the street again the next day. One of the neighbours was out front mowing his lawn. In a rather unusual move (in my experience), Greg pulled over and had a chat with the fellow mowing the lawn.

Greg said he was considering buying a home on the street and asked about the area. The homeowner filled him in on the street.

It turned out that the two homes with driveways full of stuff were both being completely renovated by new owners.

The homes that were for sale had come up at the same time by coincidence:

  • one family had been transferred for a new job
  • one family had experienced a death of the homeowner
  • another was a young family moving to a larger home.

He told Greg it was a great street with a strong sense of community where people looked out for each other.

Now, I’d never thought about giving a home or street a second chance. When I’ve been out looking for a new home, I’ve gone with my first impression and left it at that.

Had I looked at this home and street, I might have kept looking.

I asked Greg how he is enjoying his new home. He said he absolutely loves the area, and that the neighbours are amazing. He is really happy now that his renovations are finished and is looking forward to a few months in the sun soon.

Where am I going with this and how does it tie into mortgages?

Buying a home is one of the largest financial commitments most people make, and there is often an element of uncertainty as to what you are getting into.

Once you have purchased a home, it is not necessarily a cheap or easy move to relocate if you decide you are unhappy.

Before you write an offer, taking a little extra time to drive around and explore the area you are considering purchasing in is a great idea.

Having said that, when I bought my current home, the original neighbours were renters. I had no idea as they treated the home like it was their own. The yard was always immaculate and they kept a very close eye on the street.

The house sold five years ago and the current owner moved in. I like to think that I am very handy and independent, but I openly admit there are several skill sets that I am not blessed with.

Mechanic-ing being one.



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Don't be overwhelmed

Buying a home is exciting. Trying to make decisions regarding your new mortgage can feel overwhelming.

I like to have time to work with my clients before we sit down with an accepted offer, to make sure they have a solid understanding of the decisions they will be making.

This isn’t always how things go, so as we move through the process I make sure they know how important it is to ask questions and understand what it is they are signing.

Over the last few weeks, I’ve had people ask questions about a couple of things I feel are important to share.

The first point is the minimum down payment you need to buy a home.

For your primary residence, the minimum down payment is five per cent. When this program was first introduced, only first-time home buyers were able to buy with five per cent down.

Now, anyone can take advantage of this option.

The second question came from a client who is upsizing to a larger family home. When we talked about a 30-year amortization, he said he thought that the maximum now was 25.

For people who have more than 20 per cent down, most lenders offer the option of 30 years. There are a few lenders that offer 35 years as well.

For people buying with less than 20 per cent down, the maximum amortization is 25 years.

Below are some of the common terms you are likely to hear.

If you are meeting with your mortgage specialist and you are not clear about the discussion, I can’t stress enough how important it is important that you ask for explanations. 

INSURED (previously known as high ratio):

When you put down less than 20 per cent of the purchase price, you will have to pay an insurance premium (mortgage loan insurance. You may hear this referred to as a CMHC or Genworth premium.

This premium is calculated on a sliding scale depending on how much you put down on your mortgage. Most home buyers choose to add this amount to their mortgage.

Regulations under The Bank Act prohibit lenders from providing mortgages in excess of 80 per cent of the purchase price or the appraised value of a property without obtaining Mortgage Loan Insurance.

INSURABLE (previously known as conventional):

A mortgage for up to 80 per cent of the purchase price of a property with an amortization of 25 years or less is considered an insurable mortgage. Mortgage insurance is available to lenders for mortgages that fall in this category.

What this means for you as a client is (in most cases) slightly better rates than if you opt for a 30 year amortization, which puts you in the category of uninsurable mortgages.

With mortgage rule changes over the last few years, a third category has been added.

UNINSURABLE:

Over the last few years several major changes were introduced that affect borrowers and rates. Mortgage insurance is no longer available (for lenders) for refinances and purchases of rental properties.

What this means for you as a client is higher interest rates for refinances and rental properties, and in some cases stricter lending criteria. Lenders now require 20 per cent down for all rental purchases.

For refinances, you can only refinance up to 80 per cent of the value of your home.

MORTGAGE LOAN INSURANCE:

High-ratio mortgages must be insured through CMHC (Canada Mortgage and Housing Corporation), Genworth Financial Canada or Canadian Guarantee. CMHC, Genworth and Canadian Guarantee provide default or high ratio insurance to the lenders protecting them against the risk of lending to homebuyers who have less equity in their homes.

An insurance premium is paid by the borrower on behalf of the lender. The insurance premium that is paid to the mortgage insurer is to protect the lender in the event that the mortgage is not paid. This is not to be confused with life, disability, or job loss insurance.

AMORTIZATION:

Amortization refers to the length of time it takes to completely pay off your mortgage. For insurable mortgages, the maximum amortization allowed is 25 years, and for conventional mortgages this extends to 30 years.

It is to your advantage (in most cases) to choose the shortest amortization you are comfortable with as you will pay less interest in the long run.

TERM:

The actual length of time money is loaned at a contracted rate. Most clients opt for a five year term. At the end of the five year term, your mortgage will come up for renewal. At that time, you will meet with your mortgage provider to choose a new term, or possibly a new lender. 

FIRST MORTGAGE:

Most borrowers only have one mortgage on their property, but in the event of default or other collection actions, the first mortgage holder has priority over any other claims.

SECOND MORTGAGE:

A higher interest rate loan that provides borrowers with additional financing if the first mortgage does not meet their total financial requirements. Second mortgages are generally expensive to set up and charge very high rates of interest. 

OPEN MORTGAGE:

With this type of mortgage, the entire principal or any part of it can be prepaid to the lender at any time without having to pay any penalty or bonus interest to the lender. The length of the term is generally six months to one year, although some banks have introduced five-year open terms. 

HOME EQUITY LINE OF CREDIT:

A Home Equity Line of Credit (HELOC) is a revolving line of credit that is secured by your home. As the line of credit is secured by your home, the risk of repayment to the lender is reduced and reflected in the rate.

A HELOC interest rate will be much lower than a personally secured loan.

The maximum amount for a HELOC is 65 per cent of your home’s value. When this is combined with a fixed portion of your mortgage the total loan-to-value cannot exceed 80%. With a HELOC mortgage product you can draw on the funds at any time and repay them at any time without penalty. 

CLOSED MORTGAGE:

These types of mortgages have a fixed term. If you were to pay out your mortgage before the mortgage maturity the lender would charge an early payout penalty. The amount of this penalty will vary, but generally it is 3 months interest or an interest rate differential calculation, whichever is greater. 

VARIABLE RATE MORTGAGE (VRM):

A variable rate mortgage has an interest rate that fluctuates with the prime rate. The prime rate is a suggested rate by the Bank of Canada and is largely affected by the bank rate.

A variable rate will be presented as a discount or premium to the prime rate. This rate can fluctuate monthly, but is most likely to fluctuate quarterly as a result of the Bank of Canada announcing the Bank Rate.

VRMs are handy mortgages when rates are falling because those rate breaks get passed along quickly as rates are adjusted. The majority of variable rate mortgages are considered convertible.

At any time during the term you can convert to a fixed rate mortgage provided it is the same or longer as the original term.

These definitions are intended to give you basic information; there are more important details for you to know depending on your personal situation.

It is really important that you make decisions based on your personal circumstances. Taking the time to educate yourself upfront may save you thousands of dollars over the long run.



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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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