A topsy turvy mortgage world

Softening housing market

Over the last few weeks, I’ve had tough conversations with a few clients.

With unprecedented rate hikes over the last few months, borrowing power and affordability for clients has declined sharply.

The housing market is softening, but not enough for the clients who need a correction the most. I had a conversation this week with one of my favourite appraisers. He said that from April to the end of June he saw a sharp correction and that he feels prices are starting to normalize now.

I feel like the housing and mortgage worlds are a bit topsy turvy right now.

One interesting (and I’m not sure that is the right word) thing that I’ve seen happen three times over the last month is backyard developers walking away from properties they wrote offers on in the first quarter of the year.

By backyard developers I mean people that have been buying up properties zoned for multi-family development on spec, hoping to flip them down the road as land assemblies or even pull together financing themselves to develop these properties.

Early in the year these people wrote subject-free offers with long closing dates (ie: September/October) in the frenzy of the spring market.

One couple accepted an offer on a home they owned with a long closing and wrote an offer to purchase another home intending to tear it down and build a fourplex on the property. Two weeks before closing their purchaser backed out and left them without the funds to complete their purchase.

They in turn looked at the decrease in value of the home (over $300,000 based on the current appraisal) they were supposed to purchase and decided they no longer wanted to move forward. They walked away from the contract.

I’m not sure of the chain reaction this caused, but most people I work with enter into these contracts in good faith. I was floored by the callous nature of these clients that choose not to move forward and am curious to see if they will be sued by the sellers.

Another challenge I’m coming across is clients who signed purchase agreements on pre-builds a year or more ago who are no longer qualifying for the financing they need because rates have increased so dramatically over the last few months.

I have four on the go that are all set to complete over the next few months. I have lost a bit of sleep over these lately. I am, however, very pleased with how the lenders have gone to bat for these clients to help make their financing work.

If you have a pre-approval or rate hold in place, or are coming to completion on a new build, I urge you to reach out to your mortgage person to confirm that your numbers still work, and that your price point hasn’t changed.

That all felt a little dark, but I really want to make sure that potential buyers know how the increased rates might affect their purchasing power. On a brighter note, I am starting to see things pick up again with more homes selling, and feel like we are moving to a more balanced market than we’ve seen over the last few years.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


The changing mortgage world

Mortgage changes

One night last week, I met with several other brokers after a learning session we attended. The group included brokers from B.C., Alberta and Ontario.

Our evening included a great discussion about the changes we are seeing in our mortgage applications these days.

It is rare for most of us to see a straightforward application where all of the pieces line up. The common theme around the table was how more often than not, our clients are having to consider different ways to qualify for their mortgages.

What do I mean by all of the pieces lining up?

In an ideal world, clients will have squeaky-clean credit with limited consumer debt, have stable employment and have the appropriate down payment saved and ready to go.

For bonus points, they are able to find a home they love in their price range and preferred neighbourhood and negotiate an accepted offer.

More often than not, we are finding that some or most of the pieces don’t line up at first glance.

I am seeing more families buying homes together – several generations contributing to the down payment and coming together so that they have enough income to qualify for the home they want to purchase.

COVID-19 affected many peoples’ finances. Some took advantage of payment deferral options even if they didn’t need to, and that has been questioned by lenders. By virtue of their type of work, many clients went weeks or even months with reduced or no income, which led to bumps in their credit.

With interest rates rising the goal post has been moved a little further away so either more income or a larger down payment is needed to qualify for the same mortgage amount.

Our conversation turned to financial management and savings habits. We talked about different ways to build your savings and the importance of having a safety net set aside for the unexpected things life throws at us.

We then shifted into different options for helping clients qualify for the mortgages they need. What was particularly interesting to me was that regardless of the province or city we are working in, these brokers are all experiencing a sense of frustration with how clients seem to be facing more and more barriers to entering the housing market.

I was grateful for this conversation as it reinforced that, as brokers, we do have many tools and products available to help our clients get into their new homes.

Although interest rates are rising, housing prices are dropping in many markets. Even with higher rates, based on lower purchase prices we are starting to see the scale levelling out a little with monthly payments.

If you have been concerned about affordability with rates on the move it is a great idea to reach out to your mortgage person to see what you qualify for before you head out shopping.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Selecting the best mortgage for you

Mortgage decisions

I had a call with one of my favorite clients recently. We are working on a refinance and lining it up for when her current mortgage term is set to renew.

We worked through everything and got to the age-old question of whether she wanted to go with a fixed rate or a variable rate.

We chatted about the refinance about two months ago, and at the time I suggested a variable rate mortgage. Her home is on a huge lot in an area of Rutland where developers are buying homes in order to tear them down and build new multi-family complexes.

She has already been approached by a realtor who is representing a developer. The realtor dangled a potential figure in front of her that has her thinking about selling and relocating. To this point, the realtor has not brought her a written offer so she is not sure whether this will actually come to pass.

So, during our call we went over the final details for her approval and circled back to the rate decision. We talked about variable because if the right offer comes along she will sign before the ink is dry. Choosing a variable means she will have a three-month interest penalty to get out of the mortgage, even if the offer comes in the month after we process her refinance.

She did mention that several people she knows went into variable mortgages earlier this spring and are not very happy with their decisions.

We circled back to her situation, and I calculated what a potential penalty might be if she opted for a fixed rate term then decided to sell right away.

Based on today’s rates and her new mortgage balance, the fixed rate mortgage would cost (approximately) an additional $13,000 should she choose to pay the mortgage out in the next few months.That being said, for the amount she stands to gain by selling to a developer, the $13,000 is a drop in the bucket. However, I’d far rather see that money in her pocket if we can make that happen.

Over the last few weeks, I have had calls with many clients asking about what interest rates are doing and in particular how the rate changes are affecting their bottom lines. During all of these calls, we talked about why they chose variable in the first place, and what their future plans are.

Sitting with a variable mortgage can feel a little stressful right now. The key is to remember why you made the decision in the first place. I have seen lenders start to drop their fixed rates over the last few weeks. However, we are still in the position of having reduced borrowing power if you choose a fixed rate term over a variable.

As an example, I’m seeing 4.59% (and lower) for five-year fixed rates on insured mortgages. Using the stress test, that means we need to calculate the payment based on a rate of 6.59%, which means one would qualify for less mortgage than if he or she opted for a variable rate.

The key is to think carefully about your options and your budget. Consider what your longer-term plans are before you sign into a longer fixed-rate term.

Life happens, plans change. Know what your options are and make sure you talk to your mortgage person about what really is the best rate decision for you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


What can impact your mortgage approval

Mortgage approvals

I’ve talked about this in previous columns and I’m going to circle back to it today.

When I jumped into mortgage brokering full time, a veteran broker shared a handout with me. She gave it to all of her clients. At the time I remember reading through the handout and thinking that it seemed really obvious, and almost a bit condescending.

As I’ve matured as a mortgage broker I have come to realize that everyone comes to the table with different levels of understanding of how mortgage financing works, and different practices for managing their money.

The handout essentially explains that once your mortgage financing is approved but not yet finalized (meaning your purchase has not completed yet) there are several things you must not do. The list includes things like:

• Buy and finance a new car

• Buy and finance new furniture for your home

• Miss any payments

• Co-sign a loan or mortgage for anyone else

• Spend part of your down payment

• Change or quit your job

In some cases making these changes may be ok and not affect your mortgage financing. If you are at the top of your debt servicing, some of these changes might result in your financing be cancelled by the lender. This could leave you in a bit of a bind.

Each lender works slightly differently. Some require all documents up front for review before they will issue an approval; others will provide a conditional approval subject to confirmation of what has been stated in the application.

Some lenders do a final audit of the file within a day or two of closing. They may pull your credit report again, and some will re-confirm your employment.

When you hear from your mortgage broker or mortgage person at the bank that all of your conditions have been signed off that means you are off to the races. Clients sometimes don’t understand that there is always fine print in the agreement that specifies any material change in your circumstances may negatively affect your mortgage approval.

So why am I circling back to this now?

Over the last month, I have worked with three different sets of clients that bought pre-builds in the Lower Mainland in 2019 and 2020. They are now on the homestretch and their new homes are almost complete.

One of the clients had an opportunity to buy a beautiful vacation home on a lake about two hours from home. She and her sister both contributed towards the down payment and signed on the mortgage together.

She assumed that she would only be responsible for half of the payment being as there were two of them on the mortgage.

What she didn’t realize is that mortgages are considered a joint and several liability which means that she is 100 per cent responsible for this payment. On any credit application we have to include the entire mortgage payment, the entire amount of property taxes, and an expense for heating.

This additional payment put her debt servicing at almost twice what it needs to be in order to qualify for a mortgage in the traditional lending world for her new condo.

Although the chance to buy the vacation property was an amazing opportunity it has now left her scrambling to find suitable financing to close on her pre-build. She doesn’t want to walk away or sell the new condo as it has almost doubled in value since she signed the original contract.

She doesn’t have anyone available to co-sign on the mortgage. She was able to come up with significantly more towards her down payment so we have found an option for her in the alternative mortgage market.

This is a temporary solution. The interest rate is almost 2% higher than what she would be paying if she were with a bank or a monoline mortgage lender. There is also a one per cent fee, which adds $4,500 to her closing costs.

This has been an expensive lesson for her, but fortunately there is a solution.

If you are under contract for a purchase, whether of a pre-build or an existing home, please reach out to your mortgage person before making any significant changes to your financial situation. There may be ways to navigate the changes without impacting your mortgage approval.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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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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