The virus and your mortgage

The uncertainty of Covid-19 and its potential impact dominates many conversations. And grocery stores.

Speculation as to how this pandemic will affect us and those around us has created an uncertain and unsettling situation.

I initially thought because I don’t need to meet clients face to face, my work could carry on with minimal interruption.

After a group I belong to chatted about how Covid-19 might affect our businesses and our lives, I realized it will likely impact my world more than I thought.

This has been a bit of an eye opener as my original thoughts were focused on my day-to-day activities, and upcoming plans that will be changing. Because I can work from almost anywhere and am set up to help clients virtually, I was thinking of streamlining my home office.

I hadn’t thought much of how the lender partners I work with might be affected.

How might this pandemic affect your mortgage?

This depends on whether you have an existing mortgage, or if you are in the process of buying a home.

Canada Mortgage and Housing Corporation (CMHC) announced that they are working with Genworth and Canada Guaranty (these are the three mortgage insurers that lenders work with when clients purchase homes with less than twenty per cent down payment).

They are looking to provide relief for Canadians who currently have mortgages and are impacted financially by Covid-19.

I haven’t seen any official updates yet, but it looks like the insurers are amending their programs to allow for up to six months of payment flexibility. This might look like:

  • Deferring payments
  • Re-amortizing the mortgage
  • Capitalizing outstanding interest into the mortgage
  • Special payment arrangements

How individual lenders choose to apply this relief is not yet known. If your income is affected and you are concerned about making your mortgage payment, it is essential that you reach out to your mortgage lender as soon as possible to discuss what options they have to support you.

How the virus might affect you if you are in the process of buying a home?

There are several (many) ways this pandemic might affect you. There are a few things I suggest you do if your purchase is closing over the next few weeks.

Reach out to your realtor, mortgage lender, and lawyer/notary to see if they anticipate any challenges.

My expectation is that most firms will be proactive in making arrangements to limit personal contact to keep everyone involved as healthy as possible.

One challenge I’ve heard of (not in the Okanagan yet) is access to timely appraisals. In some markets, people are having difficulties arranging timely appraisals as firms are choosing to take time off to avoid potential exposure to the virus.

I had a discussion with one of my favourite lenders Friday afternoon. They have made arrangements for the majority of their staff to work from home to maintain their turnaround times and amazing client service.

If you are writing an offer to purchase a home, ask for a few extra days for your subject removal in case your approval is delayed.

Delays may happen due to staffing issues with either your lender or the other professionals involved with your approval (home inspector, legal representative, etc.).

As more information becomes available regarding how lenders will support their clients affected by Covid-19, we will do our best to share it publicly. 

Feel free to reach out if there is any way we can potentially help. Hoping that you and your loved ones navigate through this safely.

Mortgage stress test change

Effective April 6, 2020, we will be using a slightly different number to qualify borrowers who are purchasing or refinancing a home. The federal government is changing the figure used to stress test mortgage borrowers.

If you aren’t clear what we mean by stress test, here is the background. 

October 2016 the government implemented the stress test for people buying homes with less than 20 per cent down. People have different theories as to why the test was introduced. The apparent intent was to ensure that Canadians didn’t overextend themselves financially by buying too much house. 

What followed was a slow down in the real estate market as people's borrowing power was reduced by roughly 20 per cent.

Prior to the roll out of the stress test, when determining how much people qualified to borrow we used the contract rate of the mortgage. The contract rate is the actual rate being offered to borrowers.

Since the introduction of the stress test, clients who put down less than 20 per cent need to qualify based on the benchmark rate (Bank of Canada published rate, which is currently 5.19 per cent). 

In January 2018, the government added a stress test for clients who put down more than 20 per cent. They must qualify based on either the benchmark rate or their contract rate plus two per cent, whichever is higher.

Starting April 6, we will be using a median interest rate plus two per cent for qualification purposes.

What is the median interest rate?

The articles I’ve read indicate that once a week the median interest rate will be set or adjusted to better reflect the interest rates currently available to mortgage clients.

One example I saw showed the median interest rate set at 2.89 per cent. In this case, clients will have to qualify at 4.89 per cent instead of the Bank of Canada Benchmark rate, which is currently 5.19 per cent.

At the same time I see several lenders have rates available around 2.69 per cent … so while the new stress test is a step in the right direction it will be interesting to see what it looks like when the rubber hits the road.

How big of a deal is this?

Doing some number crunching on a few of my clients’ files, I see an increase in the amount they can borrow of about three per cent. Will that make a significant difference? For some families it absolutely will.

What is more important is that this is the first decrease to the stress test since it was introduced. Linking the stress test to a median interest rate will (in theory) mean a more responsive evaluation based on rates that are currently available.

I am off to a Mortgage Professionals Canada conference in Toronto this week and am looking forward to learning more about how this will affect my clients.

The evening of March 10, we are hosting a Home Buyers Seminar. We will be covering the basics of qualifying for a mortgage and going through what to expect throughout the process of buying a home. Brian Stephenson of Pushor Mitchell will be joining us to explain the legal end of a home purchase. 

Whether you are a first-time buyer or have bought homes in the past, you are welcome to join us. We are keeping the group small so that people are comfortable asking questions. For more details and if you would like to attend please email me at [email protected] to reserve your seat. 

Buying a strata property? Read the fine print

Not all stratas are equal

I talked about buying strata properties in a previous column. After a few recent escapades with condo purchases, I think I’d like to talk about it again.

Strata properties can offer the convenience of shared maintenance costs, security, benefits like pools and workout rooms, and in some cases a more attractive price point. For people with busy schedules that don’t have the desire to spend time on yard work (or shoveling!) strata properties can be a great fit.

Strata properties are managed by strata councils. There are legal requirements with respect to meetings, finances and insurance, record keeping, maintenance and upkeep, as well as bylaws and rules. 

Not all strata properties are created equal.

People don’t realize the importance of taking the time to read through the strata documents when they are considering buying a strata property.

From a financing perspective there are several pieces that lenders look for.

Lenders and insurers (CMHC, Genworth, Canada Guaranty) will read through strata documents, particularly meeting minutes, financials, and depreciation reports. They are looking to see if the building(s) have been well maintained, and if there are adequate funds in the strata’s contingency reserve fund (CRF) to cover any upcoming projects or unexpected issues.

They will look to see if the strata has planned and budgeted for ongoing maintenance and updates to ensure the buildings stay in marketable condition.

Lenders look to see if there is a rental pool or if there are rental restrictions. They are looking to see if there are any age restrictions.

So how does this affect you as a potential buyer?

If buildings have not been properly maintained or have had significant structural issues, they are sometimes flagged by mortgage default insurers. This means that those insurers won’t cover new mortgages for people trying to build into the complexes until those issues have been rectified or remediated.

If the building has been flagged, it can mean that you are unable to find mortgage financing to purchase a unit in that building. 

This can also mean increased strata fees to cover big repairs. This may also lead to special assessments. Special assessments are used by stratas to raise significant funds relatively quickly to deal with major expenses.

Over the last year I’ve talked to clients that have had to deal with special assessments of $23,000 and $10,000 respectively. Neither of these clients were in the position to come up with the cash, so they are both on payment plans. In both situations this additional monthly payment has created financial distress.

Increased strata fees and special assessments can happen in any strata complex, but if you are looking at purchasing a unit in a complex that has ongoing issues or minimal funds in the contingency reserve fund you need to think about what that may look like down the road for your finances.

Having said that, just because a building has had issues in the past does not mean you should cross it off your list of potential purchases.

Do your homework. Check to see if the strata has dealt with any outstanding issues, and if they have documentation to confirm that.

We were recently able to obtain approval in a complex that the insurers had flagged. 

For over two years the building had been flagged due to maintenance issues. In this case any units that sold were sold to cash buyers as lenders wouldn’t touch the complex.

Major work was done and an engineer’s report was ordered to confirm the damage had been dealt with.

Both the lender and the insurer went through all of the documents and approved the financing because all issues had been dealt with and the strata has taken steps to rebuild their contingency fund and ensure necessary maintenance is planned for in the future.

The other issue that has been in the news recently is condo insurance. It seems like insurance premiums have gone up dramatically over the last year. My own home insurance policy just came up for renewal with an increase of almost thirty per cent. I’ve never made any claims.

For buildings that have had significant claims, the increased premiums have a significant on the strata’s financial position.

It will be interesting to see how lenders address this issue moving forward.

This felt a bit cautionary. The intent of this information is not to scare you off of purchasing a specific property, but rather to encourage you to do your homework and learn about the strata you are buying into.  Your realtor will be able to help you find answers to your questions, and it is important to have your lawyer or notary review the strata documents before you move forward with your purchase.

The spring market feels to be picking up. If you are looking to get into the housing market, a strata property might be the ideal fit!

Mortgage closing challenges

Sometimes we run into bumps at closing time. Even when clients are organized and take care of everything they need to, last-minute issues may arise that make for a stressful few days.

One of the pieces that you need to take care of prior to your mortgage closing (finalizing) is buying home insurance. Sounds fairly simple, but this part of the process can cause headaches for you.

Earlier in the homebuying process, before you pull your subjects, you need to confirm that the home you are buying is insurable. Your insurance broker will ask you a series of questions about the property you are buying and provide a quote for insurance.

Fast forward to the week before your mortgage closes, when you go to actually purchase the insurance.

There are a few issues I’ve seen lately that you need to think about as you are buying a home and researching your insurance coverage.

I am hearing from more clients that the insurance companies are declining insurance (or limiting what it covers) for homes if the water tank is more than 10 years old.

Two summers ago clients of mine ran into a situation where they had to scramble at the last minute for insurance. They had done their homework upfront.  Three days before closing, a wildfire broke out near Peachland.

The company he had originally contacted wouldn’t provide insurance within 50 miles of an active fire.

After two frantic days of calls trying to find an insurance company that would offer a policy, the clients’ mortgage closed two days late.

Most recently, we ran into a situation where the clients purchased their insurance. The replacement value of the policy was about $75,000 less than the purchase price of the home.

This is quite standard, as the replacement cost does not include the value of the land.

Your lawyer has to confirm that you have adequate insurance in place. In this case, the lender told the lawyer that either the client had replacement coverage for the full value of the mortgage or they would not finalize the mortgage.

My poor clients were in a panic, afraid they would be homeless.

This was a fairly straightforward situation to fix – several calls back and forth with the lender and the insurance was signed off.  However, it was certainly a stressful few days for all involved.

Last, and certainly not least, is a noticeable increase in the cost of home insurance. If you bought a home with a longer closing, say two or three months down the road, you may want to have a little more of a buffer available for your home insurance.

I have heard from several clients that the cost of their insurance had increased when they went to finalize their policy. Mine is coming up for renewal and the increase is almost 30 per cent from last year.

It’s important to keep your mortgage professional looped in when you run into these challenges. Often we are able to help you navigate through, reduce (minimize?) your stress, and help keep things on track for closing on time.

More The Mortgage Gal articles

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


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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