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The-Mortgage-Gal

2nd mortgage helps sleep

One of my clients just had her first decent sleep in two years.

In my last column, I wrote about her. She just popped into the office to tell me that her second mortgage had been finalized and all her bills were paid.

And, as a result, she slept – soundly.

We talked about the next step of her plan, which is staying on top of her bills and waiting for her credit score to improve so we can move her back to an A lender.

Over the last 1 ½ years I’ve heard that the intent of the mortgage Stress Test (qualifying clients at the Bank of Canada Benchmark rate or their rate plus two per cent) is to protect Canadians from over-extending themselves.

I talked about that in an earlier column.

In reality, the clients I see who are most impacted by the Stress Test are ones who already own their homes and are looking to refinance to pay off outstanding credit cards and personal loans.

Mortgage approvals have always been subject to a thorough review and approval process; clients need to demonstrate that they are employed (have the financial capacity to repay their mortgage), have a down payment, and have a history of managing their credit.

On the other hand, most people can apply for another credit card or increase their existing limit fairly easily. They can pop in to a car dealership on a whim and leave at the end of the day with a shiny new ride.

This is by no means a simple issue that is solved by tightening up the maximum mortgage amount that people qualify to borrow.

Life happens. People can become over-extended due to changes in life circumstances such as:

  • job loss
  • separation/divorce
  • illness
  • the expense of sending a child to college
  • or any number of crises.

Since the introduction of the Stress Test, I see more and more clients who are finding that their only option for accessing equity in their home is an alternative lender.

These lenders generally come with a fee and higher interest rates.

Even with the fees and higher rates, alternative mortgage options can be the solution to help clients get their feet solidly beneath them again.

Last week, I attended a learning session organized by CMBA-BC (Canadian Mortgage Brokers Association – British Columbia). Any time I attend training, I come away with something valuable that helps me better support my clients.

One of the speakers was Ray Basi, Director of Education and Policy at CMBA – BC. He explored the pros, cons, and pitfalls of second mortgages.

The fact that our association added this topic to the agenda tells me I am not the only broker facing this challenge.

The Bank of Canada Benchmark rate has increased again, reducing borrowing power again by approximately  $2,000 per $100,0000 that people are looking to mortgage (ie: if they qualified to borrow $400,000, that figure is now reduced to $392,000).

I heard last week of an alternative lender now offering a 40-year amortization. Although this might solve the immediate crisis of qualifying clients for financing, I don’t like to see the longer-term implication, which is an increase in interest that clients might pay over the lifetime of their mortgage.

People who are not facing financial challenges are quick to say that if people can’t afford to refinance, they should sell their homes. The irony is that in our market, rent is often higher than what those clients are paying for their mortgage.

Although there are certainly options available, I think we are in for a bit of a rough ride until we adjust to the new way of doing business. 



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Buying a strata property

When you write an offer to buy a home, life seems to go into fast forward mode.

Between negotiating the offer, having your financing approved, co-ordinating and attending the home inspection, and potentially selling your current home, it’s easy to get caught up in the whirlwind and becoming overwhelmed by some of the details.

During the last two weeks, I’ve had two separate clients dealing with strata-related issues, so I thought I’d share some information for you to think about if you are considering buying a strata unit.

I’m working with a client who is buying a condo on Vancouver Island. Although the building is older, the unit he is buying is lovely; it has been completely updated and is move-in ready.

He made sure he had his finances organized before writing an offer, so this should have been a straight forward approval.

When the strata documents were reviewed by CMHC, they questioned why the Strata’s contingency fund was so low.

In this situation, the Strata had been carefully planning extensive renovations to the building. They had just finished re-doing the roof, siding, and updating all of the common areas.

My client’s mortgage was approved, but it pointed out for me the importance of clients reviewing and understanding strata documents during the purchase process.

What is a contingency fund? Essentially, this is a reserve account set aside for potential repairs or upgrades that will need to be done by the strata complex. These are generally big-ticket items that do not happen on a regular basis.

Operating funds, on the other hand, cover the day to day expenses of running the strata complex. Items covered by the operating fund include things like:

  • insurance
  • landscaping
  • utilities
  • regular maintenance.

The second clients I mentioned are a retired couple living in an older complex here in Kelowna. They have a small mortgage and manage nicely on their pension income.

They found out recently that they need to come up with almost $25,000 to cover a special assessment. This assessment is to cover the expense of replacing the roof and siding on their building.

What is a special assessment?

A special assessment can be levied by a strata council to cover extraordinary expenses that arise when the strata does not have adequate money to cover the expense.

In this situation, the Strata did not have adequate reserves (in their contingency fund). Owners of the units are being offered options as to how to cover their share of the costs.

In this case, my clients either need to come up with the $25,000 up front, or their strata fees will be increased by almost $200 per month.

Living on a fixed income, they are concerned that the $200 a month will create hardship for them.

The challenge for these clients is that on their pension income, under the new lending guidelines they no longer qualify for the mortgage they are carrying, never mind increasing it by $25,000.

Their mortgage payment and current strata fee total about $750. They cannot find a home or apartment to rent for anywhere near that amount.

Puts them between a rock and a hard place.

Which brings me back to reviewing and understanding your strata documents, and playing an active role in your strata council (or at least attending meetings and participating in decisions that affect the finances of your strata).

This is important for not only purchasers but also for current owners.

A well-run Strata has a plan in place to address upcoming upgrades and major maintenance issues. This plan is usually laid out in a depreciation report, which outlines when major projects will be scheduled and helps the Strata make informed financial decisions so that funds are on hand when needed.

Strata owners vote about how finances are handled. As an owner, you can see how important your input can be.

The final important piece to consider is a review of the minutes from the previous AGM (Annual General Meeting) and the last year or so of strata minutes. You will be able to see how issues are handled, and if the Strata for the council is planning proactively for upcoming expenses.

These minutes will also likely show if the owners are a fairly harmonious group, or if there are strained relationships between owners.

Many people don’t really understand the ins and outs of living in a strata complex. For a general overview of the expectations and obligations of stratas, you can find a great overview on the provincial government’s page.

Your realtor will provide strata documents for you to review. It is important that you take some time to read the information provided and ask some general questions so you understand the health of the Strata’s finances.

If you are purchasing privately, I encourage you to hire a lawyer to review the documents on your behalf.

A few minutes spent up front, and awareness of how your Strata is making strategic decisions, can potentially save you major stress down the road.



Be ready when life happens

“I wish I’d known about these options a year ago. I went to my bank and they said there was nothing I could do, that I should just sell my car or lose my house.”

These conversations break my heart. And they happen more often than I like.

This young lady called me two weeks ago. After a quick conversation I emailed her a list of documents to gather and I met with her the following day.

Here’s the scenario:

  • She owns a home in downtown Kelowna worth about $600,000
  • Her mortgage balance is $195,000
  • She owes about $20,000 on a vehicle loan and $35,000 on a credit line
  • She has been off on Long Term Disability for almost two years, but will be returning to work in the next six months or so; this income is about $20,000 a year less than her employment income

Initially, she managed OK on the reduced income. Over time, life happened. She needed to replace her hot-water tank. The cost of utilities increased. She supplemented her income by drawing on her credit line. The balance crept up.

She went to her bank a year ago to see if they were able to refinance her mortgage. The person who took her application said that she did not qualify and that she had better sell her car or lose her house.

A year went by. She fell behind on her cell bill, loan payment, and eventually her mortgage payment.

She went back to the bank and again was told she had no options. This was a horrible day as she realized she had hit the end of what she could manage. She thought she was indeed going to lose her home.

Later that night, she confided in a friend, who asked if she had spoken with a mortgage broker. They found my page through Google and she reached out the following day.

With as much equity as she has in her home, she does indeed have options outside of the traditional bank mortgage.

After putting her application together I approached several B lenders with her application. Because she had missed mortgage payments over the last year, I had a tough time finding the right fit.

I did find a B lender that indicated that they would happily approved the file once she had six months without missing a mortgage payment.

The next route was to look for a private mortgage to clean up her mortgage arrears, outstanding cell phone collection, and the vehicle loan that was also in arrears.

Within two days, we had an approval subject to the appraisal coming in at $400,000 or more. The lender built in a small cushion to cover any emergencies that may come up in the next year.

She signed off the documents the following day and is just waiting for the appraisal to be completed. Once that is signed off, she should have everything cleaned up next week.

This is step one of a three-step plan to get her back in to a mortgage with an A lender. After six or seven months go by, we will be approaching the B lender to refinance her current mortgage to payout the private mortgage.

After a year has passed, assuming she stays on track and is back to work, we will be approaching an A lender again.

This is by no means my preferred route to help clients clean up their finances. Had I met this client a year ago, this likely would have been a two-step process – move to a B lender for one year to re-establish clean credit, then back to an A lender.

I used to avoid private mortgages at all costs. I felt I was doing clients a disservice as they involve fees and higher rates. However, sometimes they serve a purpose.

With the new mortgage qualification rules (Stress Test), I am running into more situations where clients do not qualify to refinance and pull equity from their homes. I’ve worked with three similar clients in the last month alone.

It’s all well and good to say that the new rules are designed to protect Canadians from over-extending themselves. What’s interesting to me is that in all three of these recent files, we’ve needed to consolidate (for the most part) credit cards that were approved with no Stress Test and minimal checks for approval.

Under the old mortgage rules, all three of these clients would have qualified for a refinance of their mortgage.

Life happens. If you are in financial crisis and do have significant equity in your home, reach out sooner rather than later for help. If your credit is still clean you have many more options to get you back on track.



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Spec tax not right fit

Since the B.C. government tax re-defined the areas affected by the Speculation Tax, I have been concerned about the impact it will have on our housing market here in the Okanagan.

Most people have an opinion about the Speculation Tax.

I expect there will be more changes before it comes into effect next year.

I see a difference between targeting foreign investors who are truly speculating and driving prices up, and including families who spend considerable time and money in our community during the course of the year.

The province’s website states “Targeting Speculators / Exempting 99 per cent of British Columbians." I’m pretty sure the first few clients I’ve seen affected feel that the tax has missed its mark.

The impact in Kelowna has been immediate. And I’m not sure if the people feeling the change are the ones targeted by the tax.

I have been working with a young family looking for a larger home as their family has expanded. They have been searching for months to find something suitable in their price range.

The stars aligned – they received an offer on their current townhouse and made an offer on a larger home. Both offers were solid and on the home stretch to having all subjects removed when it was announced that Kelowna would be subject to the Speculation Tax.

The buyer of their home walked away. The buyer lived in Alberta and had planned to split their time between Fort McMurray and Kelowna. Their lawyer did some research, but could not find a definitive answer (for their specific circumstance) as to whether they would have to pay the new tax or not.

My clients lost out on the home they’d made an offer on as the sellers were not interested in extending the contract. My guess is that the sellers of the home they were trying to buy already had an offer in play on another home as well.

Regardless of where you stand with respect to out-of-town buyers, people who own vacation properties here contribute to our economy. Hospitality and retail businesses benefit directly. Although I don’t have hard facts to back this up, I wonder how much trickle down there will be on local businesses.

Until I read an article on CBC about Squamish Mayor Patricia Heintzman asking that Squamish be added to the areas included in the tax, I hadn’t thought too much as to how the program would affect other areas of the province.

Her concern is that people will be looking to buy in Squamish to avoid the tax, and prices will rise disproportionately and create more of a housing shortage. Lack of affordable housing is already a concern for the area and this new dynamic (she feels) will make it exponentially worse.

That brings me to our area. Kelowna and West Kelowna are, at this time, subject to the tax. Penticton, Lake Country, and Vernon are not.

Affordable housing is already at a premium throughout the Okanagan and driving purchasers from Kelowna will likely create a more significant issue in the smaller communities.

According to the province’s website, “the speculation tax will help make sure British Columbians can afford to live in their own province." I’m not entirely sure that this is the right fix.

Does something need to be done to help create affordable housing, whether to rent or buy?

Absolutely.

Do I think this new program was rolled out without adequate consultation or consideration of the fall-out?

Absolutely.

It will be interesting to see what happens with our housing market over the next few months.



More The Mortgage Gal articles

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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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