New mortgage or refinance?

After the last few months of craziness in the housing market, I’m hearing from clients reevaluating whether they still want to upgrade to a newer or larger home.

They are getting frustrated with being sucked into bidding wars and feeling like they have to pay significant amounts over list price just to buy a home right now.

Several of these clients are first time home buyers, so they are going to hold tight renting for now.

One couple decided to move into their parents’ basement so they can cut costs and save more toward their down payment.

Two other families have decided to refinance their current homes to do massive renovations. Both love their current neighbourhoods, but wanted updated finishes and more modern floor plans.

By refinancing their current homes and staying put, they are still going to be able to accomplish this.

Due to the increase in the values of their homes there is enough equity to cover the costs of the renovations they are planning.

How does this work?

Current guidelines allow clients to refinance to 80% of the value of their home. For instance, if your home appraises at $500,000. you could refinance to a total of $400,000.

If you bought your home several years ago, it is likely the value has increased enough to allow for a refinance. Let’s say you bought your home ten years ago for $400,000.

Depending on the amortization and payment schedule you chose, let’s say your mortgage balance is now $300,000. The current market value of your home is $600,000.

This means, provided you qualify to carry the larger mortgage, you could refinance up to $480,000.

I don’t recommend maxing out your mortgage based on current values, but considering pulling some equity to renovate or expand your current home might be a great option as opposed to jumping into the fray of trying to buy a newer or larger home.

This might also be a great option to prepare your home to sell if you are definitely planning to move.

Presenting your home in its best light may increase the value to put you into a different price point if you do want to sell.

Mortgages going sideways

This morning, on one of our broker forums, I read a question from another broker.

He asked which lender would be able to finalize a mortgage for April 30 if he submits the application April 26.

In a nutshell, other brokers commented that this would likely be impossible right now. Five business day turnaround is quite a feat at the best of times.

I’ve done it twice, and it makes for a very stressful five days.

I cringed inside for this broker. My guess is that something went sideways for this file the week before closing. It happens.

How can this happen? There are a couple of things that come to mind.

Lenders each have their own way of doing things. Some require full documents at the time of submission for approval; others will issue an approval with a list of items (conditions) that need to be confirmed prior to the mortgage finalizing.

With the benefit of age and experience, my goal is that my clients have all of their lender’s conditions signed off before they remove their financing condition and make their Offer to Purchase a firm and binding contract.

Beautiful in theory, but it seems like in this crazy market it rarely happens.

Why mightn’t all of a client’s mortgage conditions be signed off before their Offer was considered firm?

With the craziness in our housing market right now, many of the participants are starting to bog down due to the overwhelming volumes. Spring is always busy, but this year has taken things to a whole new level.

  • Lenders who normally have 24-48 hour turnaround times for approvals and document review are now running at double or even triple that.
  • Because so many people are writing offers significantly higher than the original asking price, more files are requiring full appraisals to confirm market value. Appraisers are booked in some areas over three weeks out.
  • Many companies have modified work arrangements for both their HR people and their employees, so having employment verifications completed in a timely manner can be an issue.
  • Strata documents can sometimes take more than a few days to arrive.
  • Many clients are writing offers with seven-day subject removal dates to make their offers more attractive.

In normal times, one week for subject removal is tight, but manageable provided everything lines up.

Another reason lately is that clients write a firm offer with no conditions. I’ve had multiple clients go in with subject-free offers because in the current sellers’ market this seems to be the only way they are able to negotiate an accepted offer.

Even though the Offer to Purchase may not include a financing subject, unless clients are purchasing their home with cash any lender approval will include conditions that need to be satisfied to finalize their approval.

Recently, clients wrote an offer with no financing subject, but thankfully included a clause about receipt of a satisfactory home inspection. We had an appraisal done, and the value came in slightly higher than what the clients had negotiated.

All their conditions were signed off by the lender. We were in great shape.

As it turned out, the home inspection on this much sought-after property revealed significant structural issues that needed to be addressed. The initial estimate for the work was just over $100,000.

Had the clients gone in with a subject-free offer, they would have been stuck closing on this home or losing their $50,000 deposit and potentially being sued.

Worse yet, had their realtor not included the home-inspection clause they would have closed on the house and found out after about the extensive work needed.

About two years ago I worked with a young, self-employed client. He had a well-established business and was making a solid income. We needed to use a specific program for self-employed clients and I took his application to a lender that promotes themselves as being the best lender for this program.

After two weeks of back and forth with the lender trying to have the client’s income confirmed, the client negotiated a week-long extension for his financing condition.

After another week of back and forth with the lender, they were still asking for more documentation. The client was not able to negotiate a further extension so removed his financing condition rather than lose out on this home.

We continued to submit more documents that the lender asked for. The requests were starting to border on absurd.

We were getting down to the wire and the lender was still asking for more documentation. Each time we sent in what they requested, it took at least three days to hear back from them.

I was beyond frustrated and I’m sure the client was stressed beyond belief. I know I was.

I had escalated the file and had my lender liaison helping from her end. On the Friday afternoon, one week before closing, the person reviewing documents on the lender’s end told me it wasn’t his problem. The client would just have to close a few days late.

This is not how things work with purchases. Clients don’t get to randomly close whichever date the lender deems appropriate. My head legitimately blew off that afternoon.

So the weekend before closing, I submitted the file to my favourite lender for approval. I had every conceivable document packaged up and sent in for review on Sunday afternoon.

I knew if any lender could make the file come together it was this one.

This file did close on time. This file reinforced for me that choosing a lender I could count on saved everyone a significant amount of stress.

Sometimes, even when all of the conditions have been signed off and it appears that all is in order, something can come out of the blue that can derail a mortgage approval.

Clients me from time to time “So my mortgage is all approved and signed off now right? They can’t cancel it?”

The answer to that question is that any lender can cancel an approval right up to moments before closing, if something comes to light that materially changes your mortgage application.

Some lenders re-check credit histories or double-check employment shortly before closing if your approval has been signed off for a long time prior to closing. They may also google their clients to see if anything pops up.

If a lender finds things like new loans that change your financing ratios, a change in employment, or something sketchy on-line, you might find yourself in a bind.

I am seeing more clients decide to step back from the market and hold off on purchasing due to the state of our market.

I am hoping that more people take a breath and don’t get sucked into the frenzy and put themselves in a bad situation. Will we see things slow down? With last week’s announcement that rates may start to climb the second half of this year, I suspect not.

If you are looking for a home, make wise decisions and have your ducks in a row. Don’t get pressured into making decisions you may regret down the road.

Mortgage rules changing

The Superintendent of Financial Institutions (OSFI) announced changes to mortgage qualification rules, on Thursday.

The proposed change is set to come into effect June 1. Clients applying for mortgage financing who have 20% (or more) down or who are looking to refinance their mortgage, will now have to qualify at a stress test rate of 5.25%.

Clients who are purchasing a home with less than 20% down will still be subject to the stress test, but still at the current rate of 4.79%.

What does this mean in dollars and cents?

This means a decrease in borrowing power (or ability to refinance) of approximately 4-4.5%.

Assuming the following:

  • Combined family income of $120,000
  • Property taxes of $4,000 annually
  • No significant debts besides the proposed mortgage
  • 20% down
  • 25-year amortization

Running the numbers as I would for a pre-qualification discussion, at the current stress test of 4.79%, this family would qualify to buy a new home at a purchase price of $750,000.

Under the proposed new stress test of 5.25%, this same family would only qualify for a purchase price
of $715,000.

It may seem like a $35,000 difference in purchase price is not such a big deal. However, in many communities across the country that $35,000 means a significant difference in either the quality or location
of the home people will be looking at.

Who will this affect?

I think this change will most affect middle-class Canadian families looking to upgrade from their starter home to a larger family home. In turn, this may trickle down and also affect new buyers trying to get into the housing market.

If people don’t qualify to upsize or upgrade their homes and are forced to stay put, this means that the inventory of starter homes will be reduced.

With a reduced inventory of starter homes there will be more competition for people trying to buy the homes that do become available.

This might mean people who otherwise qualify to buy a home are forced to continue to rent.

When the stress test was introduced in October 2016 for insured mortgages and subsequently in January 2018 for uninsured mortgages, there was a great deal of conjecture about the long-term impacts of these qualification changes.

We saw lenders adapt some of their policies that helped to ease the impact of the stress test.

As an example, multiple lenders who did not previously include government benefits like Child Tax Credit are now including this income to help more clients qualify.

We saw more and more clients leaning on the bank of mom and dad to increase their down payment or sign as co-borrowers for their mortgages.

Despite the initial pushback and outcry, we have adjusted to the new qualification guidelines. We will again to the proposed changes coming in June.

Ostensibly, this most recent change is geared to cool our crazy housing market. I don’t think this will have the desired effect.

If you are currently shopping for a home and have been pre-qualified based on a down payment of 20% or more, I urge you to reach out to your mortgage professional to double-check how the proposed changes may affect your application.

As the proposed change is still so new so I’m sure we will learn more over the next few weeks. An article posted on the Canadian Mortgage Trends site provided an avenue for public feedback:

The public is invited to provide feedback to OSFI via [email protected], which will be accepted up to May 7.

OSFI will then communicate some of that feedback and any final amendments to the qualifying rate by May 24, prior to the new stress test taking effect on June 1.

Again, for people currently shopping (with 20% or more down) or considering refinancing their home I think it is important to connect with your mortgage person to double-check if and how the proposed change will affect your mortgage application before you write an offer on a home.

Mortgage frenzy

Back in January, I shared my thoughts about the challenges that potential buyers are having trying to buy homes right now.

I likened it to an episode of The Amazing Race.

I’m starting to feel like its more a season of the series as opposed to an episode. It is not just our market. I’ve spoken with mortgage colleagues, and it sounds like clients are facing the same challenges across the country.

I finished my last column with my desire to see a more balanced, less frenetic market.

During the last month, I’ve seen a few sellers scrambling to buy a property once their home sells. Purchasers are coming in with highly desirable offers – writing offers with figures well over the asking price and tight closing dates.

Due to overwhelming volumes, lenders are starting to bog down. Turnaround times are creeping up. And due to the prices offered, I’m seeing fewer homes pass lenders’ AVM systems so more appraisals are being required by lenders.

If you haven’t heard the term before, google explains that AVM stands for Automated Valuation Models.

AVMs are statistically based computer programs that use real estate information such as comparable sales, property characteristics, and price trends to provide a current estimate of market value for a specific property.

An AVM report provides a written summary of the results.

Part of what we do as mortgage brokers is find the right fit for our clients. Each lender has different niches, policies, and procedures. At the beginning of March, I submitted to one of my favourite lenders that normally has approvals back within 48 hours.

I waited 12 days for an approval on a straight forward purchase with amazing clients. The approval came with one of the conditions being an appraisal to confirm the value.

Appraisers are being inundated and in some centres are booking a week to 10 days out.

This is a serious challenge right now because I’m seeing offers with five or seven days for subject removal. With the market as hot as it is, sellers are not keen on signing extensions.

Home inspectors are swamped and also booking over a week out in some cases.

To add another level of complexity, lawyers and notaries are swamped. One of my clients went to four different lawyers before she could get someone to act on her behalf for an April 30 closing date.

Apart from the stress of trying to make sure all of these moving pieces line up for our clients, my major concern is potential buyer’s remorse down the line.

One of my clients received a brilliant offer on his home, with a closing date of (you guessed it) April 30. He was fortunate to nail down an accepted offer on a home that seemed to check all the boxes. I had an approval in place for him. Then he panicked.

He collapsed the offer he had in place, thinking he would find something else that he would be happier with. He wrote an offer on another property and we finally have an approval in place on the second home.

Chatting with him last week, he said that this was certainly not his dream home but there was nothing else available.

This felt frustrating to me. Clients are panicking and writing offers on properties they don’t love to make sure they have a roof over their heads. This can be an expensive game if you decide you truly hate the home and need to move again.

If you are trying to buy a home, please try to allow for at least two weeks for subject removal for your financing. Touch base up front with whomever you want to work with for your legal documents to make sure they can act on your behalf.

Most important, be patient with the team that is working so hard to help you buy your dream home. There is a lot of work that happens behind the scenes, and in the whirlwind of activity and emotion it’s important to maintain perspective.

Quick reminder – if you are a homeowner, don’t forget to complete your declaration for the Speculation Tax. This needs to be completed by March 31.

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 www.okanaganmortgages.com

Visit their blog at 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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