26 May

WHY DOES CMHC’S EVAN SIDDALL THINK CANADA IS HEADED FOR A ‘DEFERRAL CLIFF’?

General

Posted by: Moreen Perimal

In comments delivered to the Standing Committee on Finance on Tuesday, Canadian Mortgage and Housing Corporation CEO Evan Siddall laid out a potentially bleak scenario for the country’s homeowners. Siddall told parliamentarians that by September if Canada’s economic recovery fails to generate enough momentum, 20 percent of mortgages could be in arrears.

“A team is at work within CMHC to help manage a growing debt ‘deferral cliff’ that looms in the fall, when some unemployed people will need to start paying their mortgages again,” Siddall said during the Committee’s videoconference. “As much as one-fifth of all mortgages could be in arrears if our economy has not recovered sufficiently.”

It was one of many disturbing claims made by Siddall, who also told the Committee that the nominal house price in Canada could fall by as much as 18 percent over the next six to 12 months, with the most significant losses expected in oil-driven economies like Alberta and Saskatchewan and overheated markets like Toronto. If prices fall by 10 percent, Siddall said first-time buyers could lose as much as $45,000 on a $300,000 home.

But the deferral issue didn’t seem to phase him.

“Canadians do an excellent job of paying their mortgages, even when they’re underwater, so our loss forecasts are not extreme,” he said in an exchange with Progressive Conservative MP Pierre Poilievre. When asked by Poilievre for CMHC’s potential loss forecast, Siddall estimated that it could be as high as $9 billion.

According to DLC’s Dr. Sherry Cooper, Siddall’s claim that 20 percent of mortgages could be delinquent by September borders on the ridiculous.

“It’s kind of bizarre to me,” she says. “Most economists are finding fault with it.”

An arrears rate of 20 percent would necessarily mean that the Bank of Canada’s efforts to ensure the availability of credit and the federal government’s pumping of billions of dollars into the economy to prevent business closures and forced bankruptcies will accelerate the rate at which Canadian mortgages are turning sour.

“The Bank of Canada estimates that the delinquency rate could move up from .25 percent to .8 percent. And now we’re talking about 20 percent delinquency rates?” Cooper says. “Give me a break.”

When asked if there was a possibility that Siddall was referring to deferrals when he used the word “arrears,” Cooper was doubtful.

“No, he’s a brilliant guy,” she says, despite the unlikelihood of his prediction.

“It’s not going to happen. The highest delinquency – which is what ‘arrears’ is – rates we’ve ever seen in history are nowhere near [the projected 20 percent],” she says.

Centum FairTrust owner Jimmy Hansra agrees with Cooper’s assessment.

“The government has been pretty proactive in terms of providing as many programs as they possibly can to weather the storm,” he says, adding that there’s “no way” Siddall’s arrears projection is accurate.

“Even his comments about CMHC seeing housing prices falling by 18 percent I think are overblown, too,” says Hansra. “Nobody knows what’s happening with house prices.”

Hansra isn’t preparing for the kind of worst-case scenario Siddall laid out. Instead, he says his team is readying themselves for a potential, although the still unlikely, stream of borrowers looking for refinancing or equity take-out solutions that will require private money.

“I don’t see it happening,” he says, “But if it does, I think that’s the only way mortgage professionals are going to be able to provide financing for their customers. Because if they’re not going to be able to make their mortgage payments and they have equity sitting in their home, either people are going to look to use home equity lines of credit to make those payments, or they’ll look for some sort of second or third mortgage financing.”

Hansra stresses that projections like Siddall’s, particularly when they’re made at a time with no parallel in human history, need to be taken with a few million grains of salt.

“It’s all a guess,” he says.

If CMHC did envision a 20 percent arrears rate by fall, a fair question to ask, says RateSpy founder Robert McLister, is why they are not acting now to mitigate what would be an utter catastrophe for the Canadian economy.

“I think that if the government thought there was going to be 20 percent arrears, they would take action,” McLister says. “You can’t have one in five homeowners not paying their mortgage, with a large percentage of those leading to liquidation. You know what that would do to home prices. You know what that would do to the economy. It’s not going to happen.”

Click here for the original release.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

2 May

THE TOP 7 MISCONCEPTIONS ABOUT REVERSE MORTGAGES

General

Posted by: Moreen Perimal

The Top 7 Misconceptions About Reverse Mortgages

How much do you really know about reverse mortgages?

Maybe you know that reverse mortgages can help Canadians 55+ access the equity in their home, tax-free.  Maybe you know that tens of thousands of Canadians are using a reverse mortgage as part of their financial plan.  But did you know that there are 7 common misconceptions when it comes to understanding reverse mortgages in Canada?  As Canada’s leading provider of reverse mortgages, HomeEquity Bank can help set the record straight.

  1. If you have a reverse mortgage, you no longer own your home.

Nothing could be further from the truth.  You always maintain title, ownership and control of your home – HomeEquity Bank simply has a first mortgage on the title.

  1. You will owe more than the value of your home in the end.

Also, untrue.  Every CHIP Reverse Mortgage from HomeEquity Bank comes with a No Negative Equity Guarantee(1) which states that as long as you – the homeowner – have met your obligations, the amount you will have to pay on the due date will not exceed the fair market value of your home.  In fact, over 99% of HomeEquity Bank’s customers retain equity in their home when they decide to sell, with over 50% of the home’s value remaining after the loan is paid back (on average).

  1. Only people younger than 62 can apply for a reverse mortgage.

In Canada, the CHIP Reverse Mortgage is available to Canadian homeowners aged 55 and older.  In fact, as you age you are more likely to qualify for a higher amount on your loan.  A reverse mortgage is a lifetime product and as long as the property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is living in the home full-time, the loan won’t be called even if the house decreases in value.

  1. Failure to make payments can result in eviction.

This myth is one of the most common when it comes to reverse mortgages.  The CHIP Reverse Mortgage does not require any monthly payments, meaning you can’t miss payments in the first place.

  1. Arranging a reverse mortgage is very expensive.

This is also untrue.  Much like a conventional mortgage, an appraisal of your property and independent legal advice is required, and your responsibility to pay for. The only remaining cost is a one-off closing and administration fee.  When you compare this to the costs of “rightsizing” to another home, you will find a much more affordable option in a reverse mortgage.

  1. Reverse mortgages have much higher interest rates than conventional mortgages.

While it’s generally true that interest rates are a bit higher than a traditional mortgage, the difference is not excessive.  Plus, making monthly mortgage payments is simply not a viable option for many retired Canadians, and – even if it were – many would struggle to qualify for a traditional mortgage in the first place.  For these reasons, many retired Canadians are choosing reverse mortgages over conventional solutions.

  1. You won’t be able to pass on your home to your children.

The idea that your children won’t be able to inherit your home is a complete myth.  Your heirs will always have the option of keeping the property by paying off your reverse mortgage after you pass away.  Plus, HomeEquity Bank’s No Negative Equity Guarantee, (1) states that if the home depreciates in value and the mortgage amount due is more than the gross proceeds from the sale of the property, HomeEquity Bank covers the difference between the sale price and the loan amount. Therefore, you will never owe more than the fair market value of the home.

To find out how much you could qualify for, try our reverse mortgage calculator, or contact me.

[1] The guarantee excludes administrative expenses and interest that have accumulated after the due date.

27 Jan

Bank of Canada Holds Steady Despite Economic Slowdown

General

Posted by: Moreen Perimal

In a more dovish statement, the Bank of Canada maintained its target for the overnight rate at 1.75% for the tenth consecutive time.  Today’s decision was widely expected as members of the Governing Council have signalled that the Bank still believes that the Canadian economy is resilient, despite the marked slowdown in growth in the fourth quarter of last year that has spilled into the early part of this year.  The economy has underperformed the forecast in the October Monetary Policy Report (MPR).

In today’s MPR, the Bank estimates a growth of only 0.3% in Q4 of 2019 and 1.3%in the first quarter of 2020.  Exports fell late last year, and business investment appears to have weakened after a strong Q3, reflecting a decline in business confidence.  Job creation has slowed, and indicators of consumer confidence and spending have been much softer than expected.  The one bright light has been residential investment, which was robust through most of 2019, moderating to a still-solid pace in the fourth quarter only because of a dearth of newly listed properties for sale.

The central bank’s press release stated that “Some of the slowdowns in growth in late 2019 were related to temporary factors that include strikes, poor weather, and inventory adjustments.  The weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted.  Moreover, during the past year, Canadians have been saving a larger share of their incomes, which could signal increased consumer caution which could dampen consumer spending but help to alleviate financial vulnerabilities at the same time.”

The January MPR states that over the projection horizon (2020 and 2021), “business investment and exports are anticipated to improve as oil transportation capacity expands, and the impact of trade policy headwinds on global growth diminishes.  Household spending is projected to strengthen, driven by solid growth of both the population and household disposable income.”  Growth is expected to be 1.6% in 2019 and 2020 and is anticipated to strengthen to 2.0% in 2021.

Inflation has remained at roughly the Bank’s target of 2% and is expected to continue at that pace.

Also from the MPR: “The level of housing activity remains solid across most of Canada, although recent indicators suggest that residential investment growth has slowed from its previously strong pace.  Demand remains robust in Quebec, where the labour market has been strong.  In Ontario and British Columbia, population growth is boosting housing demand.  In contrast, Alberta’s housing market continues to adjust to challenges in the oil and gas sector.  Nationally, house prices have continued to increase and should strengthen slightly in the near term, consistent with the responses to the Bank’s recent Canadian Survey of Consumer Expectations.”

Bottom Line: The Canadian dollar sold off on the release of this statement and I believe there is a downside risk to the Bank of Canada forecast.  Today’s release is a more dovish statement than last month, showing less confidence in the outlook.  The Governing Council did express concern that the recent weakness in growth could be more persistent than their current forecast, saying that “the Bank will be paying particular attention to developments in consumer spending, the housing market, and business investment.”  They also raised estimates of slack in the economy and dropped language about the current rate is appropriate.

According to Bloomberg News, today’s Governing Council comments “are a departure from recent communications in which officials sought to accentuate the positives of an economy that had been running near capacity and was deemed resilient in the face of global uncertainty.  While Wednesday’s decision still leaves the Bank of Canada with the highest policy rate among major advanced economies, markets may interpret the statement as an attempt to, at the very least, open the door for a future move.”

18 Jan

HOW TO VERIFY YOUR DOWN PAYMENT WHEN BUYING A HOME

General

Posted by: Moreen Perimal

Saving for a down payment is one of the biggest challenges facing people wanting to buy their first home.
To fulfill the conditions of your mortgage approval, it’s all about what you can prove (hard to believe – but some people have lied in the past – horrors!).

Documentation of down payment is required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which changes your lending ratios and potential your mortgage approval.

DOCUMENTATION REQUIRED BY THE LENDER TO VERIFY YOUR DOWN PAYMENT

This is a government anti-money laundering requirement and protects the lender against fraud.

1. Personal Savings/Investments: Your lender needs to see a minimum of 3 months’ history of where the money for your down payment is coming from, including your: savings, Tax-Free Savings Account (TFSA) or investment money.

  • Regularly deposit all your cash in the bank, don’t squirrel your money away at home.  Lenders don’t like to hear that you’ve just collected $10,000 cash that has been sitting under your mattress.  Your bank statements will need to show your name and your account number clearly.
  • Any large deposits outside of “normal” will need to be explained (i.e. tax return, a bonus from work, sale of a large ticket item).  If you have transferred money from one account to another, you will need to show a record of the money, leaving one account and arriving in the other.  Lenders want to see a paper trail of where your down payment is coming from and how it got into your account.

2. Gifted Down Payment: In some expensive real estate markets like Metro Vancouver & Toronto, the bank of Mom & Dad help 20% of first time home buyers. You can use these gifted funds for your down payment if you have a signed gift letter from your family member that states the down payment is a true gift, and no repayment is required.

  • Gifted down payments are only acceptable from immediate family members: parents, grandparents & siblings.
  • Be prepared to show the gifted funds have been deposited in your account 15 days before closing. The lender may want to see a transaction record. i.e. $30,000 from Bank of Mom & Dad’s account transferred to yours and history of the $30,000 landing in your account.  Bank documents will need to show the account number and names for the giver and receiver of the funds.  Contact me for a sample gift letter.

3. Using your RRSP: If you’re a First Time Home Buyer, you may qualify to use up to $35,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.

  • Home Buyers Plan (HBP): Qualifying home buyers can withdraw up to $35,000 from their RRSPs to assist with the purchase of a home.  The funds are not required to be used only for the down payment, but for other purposes to assist in the purchase of a home.
  • If you buy a qualifying home together with your spouse or other individuals, each of you can withdraw up to $35,000.
  • You must repay all withdrawals to your RRSP’s 15 years.  Generally, you will have to repay an amount to your RRSP each year until you have repaid the entire amount you withdrew.  If you do not repay the amount due for a year (i.e. $35,000/15 years = $2,333.33 per year), it will be added to your income for that year.
  • Verifying your down payment from your RRSP, you will need to prove the funds show a 3-month RRSP history via your account statements, which need to include your name and account number.  Funds must be sitting in your account for 90 days to use them for HBP.

4. Proceeds from Selling Your Existing Home: If your down payment is coming from the proceeds of selling your current home, then you will need to show your lender an accepted offer of Purchase and Sale (with all subjects removed) between you and the buyer of your current home.

  • If you have an existing mortgage on your current home, you will need to provide an up-to-date mortgage statement.

5. Money from Outside Canada: Using funds from outside of Canada is acceptable, but you need to have the money on deposit in a Canadian financial institution at least 30 days before your closing date.  Most lenders will also want to see that you have enough funds to cover Property Transfer Tax (in BC) PLUS 1.5% of the purchase price available in your account to cover your closing costs (i.e. legal, appraisal, home inspection, taxes, etc.).

  • Property Transfer Tax (PTT) All buyers pay Property Transfer Tax (except first-time buyers purchasing under $500,000 and New Builds under $750,000). This is a cash expense, in addition to your down payment.
    Property Transfer Tax (PTT) cannot be financed into the mortgage

Buying a home for the first time can be stressful, therefore being prepared with the right documentation for your down payment and closing costs can make the process much more comfortable.

Mortgages are complicated, but they don’t have to be. Contact me for more information!

9 Dec

PRINCIPAL & INTEREST

General

Posted by: Moreen Perimal

 

 

 

 

 

 

Principal and interest are the two components that make up a mortgage payment.  The principal is the portion of your payment that goes towards paying down the outstanding balance of your mortgage.  Interest is the other portion of your payment which goes directly into the pockets of your lender and does not contribute to paying down your mortgage balance.

What some people may not realize is that a compounding interest rate (what the majority of all mortgages are) is weighted differently depending on how many years you have left on your mortgage.

If a young couple were to purchase their very first home, let’s say $500,000 for example, and they had a $100,000 down payment, their mortgage would be $400,000.  If they had today’s interest rates, their mortgage would be around 3%, compounded semi-annually, over 25 years with their interest rate re-negotiable every 5-years if they keep the same term.  Assuming they were able to get 3% for the entire 25-years, their monthly payments would be $1,892.98 a month for the life of their mortgage.

Their first payment, however, is not $1,892.98, with 97% of it going to paying down the $400,000 balance and 3% going towards interest.  The very first payment would actually be broken down as $993.81 of interest and $899.17 going towards paying down the principal balance of $400,000.

Now, it won’t stay like this forever, the very last payment before the first 5-year term is up would be broken down as $854.62 going towards interest and $1,038.36 of the $1,892.98 going towards paying down the principal.  It wouldn’t be until year 10 where the interest portion dips below $500.

If you can, any pre-payments you make each month will directly pay down the principal balance outstanding.  This will also, in turn, allow for less interest to be charged as interest is always calculated based on the current balance outstanding.  In the later years, it may not be as advantageous, but in the first 5-10 years, it can be extremely beneficial.

If you want to see the break down of principal and interest portions inside your own mortgage, feel free to reach out to me!

9 Dec

PAYMENT FREQUENCY

General

Posted by: Moreen Perimal

 

 

 

 

One of the decisions you will need to make before your new mortgage is set up, is what kind of payment frequency you would like to have.  For many, sticking to a monthly payment is the default, however, different frequencies may end up saving you less interest over time.

Monthly Payments

Monthly payments are exactly as they sound, one payment every month until the maturity date of your mortgage at the end of your term.  Took a 3-year term? You will make 36 payments (12 payments a year) and then you will need to renegotiate your interest rate.  5-year term?  You will make 60 payments.

$500,000 mortgage

3% interest rate

5-year term

$2,366.23 monthly payment

$427,372.90 remaining over 20 years

$69,346.70 paid to interest

$72,627.01 paid to principal

Semi-Monthly

Semi-monthly is not bi-weekly.  Semi-monthly is your monthly payment divided by two.  That means, you are making 24 payments every year, but each payment is slightly less than half of what the monthly payment would have been.

$500,000 mortgage

3% interest rate

5-year term

$1,182.38 semi-monthly payment

$427,372.99 remaining over 20 years

$69,258.59 paid to interest

$72,627.01 paid to principal

Bi-Weekly

Bi-weekly, you are not making 2 payments every month.  With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly (2 months a year you make 3 bi-weekly payments).  The interest paid and balance owing is slightly less than the others, but mere cents.  You will still need to make payments for another 20 years.

$500,000 mortgage

3% interest rate

5-year term

$1,091.38 bi-weekly payment

$427,372.36 remaining over 20 years

$69,251.76 paid to interest

$72,627.64 paid to principal

Accelerated Bi-Weekly

Just like regular bi-weekly, you are not making 2 payments every month.  With 52 weeks in a year, you are actually making 26 payments, 2 more than semi-monthly.  However because this is accelerated, the payment amount is higher.

$500,000 mortgage

3% interest rate

5-year term

$1,183.11 accelerated bi-weekly payment

$414,521.40 remaining over 17 years 4 months

$68,325.70 paid to interest

$85,478.60 paid to principal

You have increased your yearly payment amount by $2,384.98, $11,924.90 over 5-years.  That extra $11,924.90 has decreased your outstanding balance at the end of your mortgage term by $12,850.96 because more of your payments went to principal and less went to interest.  Also, you will now have your mortgage paid off more than 2.5 years earlier.

The same option is available for accelerated weekly payments which will shave another month off of time required to pay back the whole loan as well.  If you can afford to go accelerated, your best option is to do so!  Especially in the early years where a larger portion of your payments is going towards interest, not paying down your principal.

If you have any more questions, please do not hesitate to reach out to me!

4 Dec

5 MISTAKES FIRST TIME HOME BUYERS MAKE

General

Posted by: Moreen Perimal

 

 

 

 

Buying a home might just be the biggest purchase of your life—it’s important to do your homework before jumping in! We have outlined the 5 mistakes First Time Home Buyers commonly make, and how you can avoid them and look like a Home Buying Champ.

1. Shopping Outside Your Budget
It’s always an excellent idea to get pre-approved prior to starting your house hunting.  This can give you a clear idea of exactly what your finances are and what you can comfortably afford.  I will give you the maximum amount that you can spend on a house but that does not mean that you should spend that full amount.  There are additional costs that you need to consider (Property Transfer Tax, Strata Fees, Legal Fees, Moving Costs) and leave room for in your budget.  Stretching yourself too thin can lead to you being “House Rich and Cash Poor” something you will want to avoid.  Instead, buying a home within your home-buying limit will allow you to be ready for any potential curveballs and to keep your savings on track.

2. Forgetting to Budget for Closing Costs
Most first-time buyers know about the down payment, but fail to realize that there are a number of costs associated with closing on a home.  These can be substantial and should not be overlooked.  They include:

  • Legal and Notary Fees
  • Property Transfer Tax (though, as a First Time Home Buyer, you might be exempt from this cost).
  • Home Inspection fees

There can also be other costs included depending on the type of mortgage and lender you work with (ex. Insurance premiums, broker/lender fees).  Check with your broker and get an estimate of what the cost will be once you have your pre-approval completed.

3. Buying a Home on Looks Alone
It can be easy to fall in love with a home the minute you walk into it.  Updated kitchen + bathrooms, beautifully redone the flooring, new appliances…what’s not to like?  But before putting in an offer on the home, be sure to look past the cosmetic upgrades.  Ask questions such as:

  1. When was the roof last done?
  2. How old is the furnace?
  3. How old is the water heater?
  4. How old is the house itself? And what upgrades have been done to electrical, plumbing, etc?
  5. When were the windows last updated?

All of these things are necessary pieces to a home and are quite expensive to finance, especially as a first- time buyer.  Look for a home that has solid, good bones. Cosmetic upgrades can be made later and are far less of a headache than these bigger upgrades.

4. Skipping the Home Inspection
In a red-hot housing market, a new trend is for homebuyers to skip the home inspection.  This is one thing we recommend you do not skip!  A home inspection can turn up so many unforeseen problems such as water damage, foundational cracks and other potential problems that would be expensive to have to repair down the road.  The inspection report will provide you with a handy checklist of all the things you should do to make sure your home is in great shape.

5. Not Using a Broker
We compare prices for everything: Cars, TV’s, Clothing… even groceries. So, it makes sense to shop around for your mortgage too!  If you are relying solely on your bank to provide you with the best rate you may be missing out on great opportunities that a Dominion Lending Centres mortgage broker can offer you.  They can work with you and multiple lenders to find the sharpest rate and the best product for your lifestyle.

4 Dec

5 REASONS YOU MAY WANT TO CONSIDER A RENT TO OWN PROPERTY

General

Posted by: Moreen Perimal

With the real estate market continuing to hold steady, many young families are looking for other options to afford a home.  Many millennial families still are holding onto the dream of owning a detached home or their own townhouse/condo one day…but the task of moving on from a rental can seem daunting and impossible.  This is where a Rent To Own (RTO) property can offer a solution.  Here are 5 reasons you may decide to look for an RTO property.

1. RTO allows you to have set savings plan to put towards one day owning the property you are currently living in.  How this works is by setting up a contract with your Landlord (seller) and agreeing to pay an amount each month that is above what your rent is currently for a set amount of time.  For example, if the property you are currently renting rents for $1.000 you would agree to pay the landlord $1400.  The additional $400 would go into an account the landlord has set up for you and towards your future down-payment.

2. RTO will allow you to make lump-sum payments during the course of the RTO contract.  It’s common with most RTO contracts to have the option to pay a lump sum payment to the down payment by giving the landlord a larger rent cheque.  Keep in mind that the down payment is non-refundable which is why it is crucial to involve a mortgage professional and lawyer in the process.

3. RTO’s will require you to be pre-approved prior to the contract going through.  This is an ideal situation as being pre-approved allows you to fully understand the other factors that contribute to you getting a mortgage.

For example:
• Your current income level
• Your current credit score
• Your current debt owing
• How much you are pre-qualified for

Knowing these numbers can highlight other areas that you may need to work on or improve during the time you are saving up for the down payment and set you on the right course for when you are ready to purchase.

4. You can pre-establish a great team of professionals working with you.  As with any mortgage product, an RTO will require you to work with a team of professionals including a mortgage broker.  Building this relationship early can help you alleviate any further speed bumps you might have down the road.  They can work with you for the entire process and make it run smoother and help you stay on track.

5. The setup is simple and offers a unique solution.  Setting up a Rent to Own starts with a contract.  The lawyer or solicitor will write this for you and should work closely with your mortgage professional to accommodate lender policies and guidelines.  Here are some of the important elements that need to be included in the RTO contract are:
• The Purchase Price
• Purchase Price negotiations formulated based on the market trends of the area in which you are buying
• The term and length of the RTO agreement
• Exit and/or assignment clauses

The RTO must be registered on the title of the subject property and RTO down payments collected through the contract must have a clear and full banking history that is supported with bank statements.  These down payments must not be spent by the seller at any time.

Once you agree on the RTO you can agree on the future purchase price and timelines as well.  This will give a target and allows one to know that once they’ve hit x amount of years over RTO payments, they will have enough of a down payment to purchase the property at the originally agreed-upon purchase price.

Now, what happens if things change and a party wants out of the contract? For the Landlord, they are required to honour it until the term is over. For the tenants, they are able to “sell” their contract to another buyer who will assume the contract to recoup your down payment. The price is usually the down payment amount that you’ve already paid to the Landlord.

The contract can also include the fact that the tenant (buyer) can purchase at certain intervals at a certain price but does not have the right to recoup your down payment.

One final thought on Rent To Own properties; There are many RTO companies and solicitors out there.  Choose wisely who you opt to work with.  Many do not fully understand the setup of an RTO contract and the contracts that need to be followed by Lender guidelines.  It is always best to have the solicitor work hand in hand with me to ensure that the contract lines up and nothing is missed during the set-up process.

This unique solution could be the answer for someone who is renting currently but is having a hard time getting their down payment together.  RTO’s are becoming more and more popular due to the high housing prices.

 

8 Nov

MORTGAGES 101 – WHAT YOU NEED TO KNOW ABOUT MORTGAGES

General

Posted by: Moreen Perimal

Mortgage [ˈmôrɡij] NOUN
With a residential mortgage, a home buyer pledges his or her house to the bank.  The bank has a claim on the house should the home buyer default on paying the mortgage.  In the case of a foreclosure, the bank may evict the home’s occupants and sell the house, using the income from the sale to clear the mortgage debt.

Mortgages in a Nutshell
Since homes are expensive, a mortgage is a lending system that allows you to pay a small portion of a home’s cost (called the down payment) upfront, while a bank/lender loans you the rest of the money.  You arrange to pay back the money that you borrowed, plus interest, over a set period of time (known as amortization), which can be as long as 30 years.

When you get a mortgage loan, you are called the mortgagor.  The lender is called the mortgagee.

How Do You Get a Mortgage?

The companies that supply you with the funds that you need to buy your home are referred to as “lenders” which can include banks, credit unions, trust companies, etc.

Mortgage lenders don’t lend hundreds of thousands of dollars to just anyone, which is why it’s so important to maintain your credit score.  Your credit score is a primary way that lenders evaluate you as a reliable borrower – that is, someone who’s likely to pay back the money in full WITHOUT a lot of hassle.  A score of 680-720 or higher generally indicates a positive financial history; a score below 680 could be detrimental, making you a higher risk.  Higher risk = higher rates!

How Mortgages Are Structure

Down payment: This is the money you must put down on a home to show a lender you have some stake in the home.  Ideally, you want to make a 20% down payment of the price of the home (e.g., $60,000 on a $300,000 home), because this will allow you to avoid the extra cost of Mortgage Default Insurance which is mandatory with all down payments of less than 20%.

Every mortgage has three components: the principal, the interest, and the amortization period.

Mortgages are typically paid back gradually in the form of a monthly mortgage payment, which will be a combination of your paying back your principal plus interest.

  1. Principal:  This is the amount of money that you are borrowing and must payback.  This is the price of the home minus your down payment
    taking the above example, purchase price $300,000 minus $60,000 down payment to get a mortgage (principal) of $240,000.
  2. Interest rate:  Lenders don’t just loan you the money because they’re nice guys.  They want to make money off you, so you will be paying them back the original amount you borrowed (principal) plus interest—a percentage of the money you borrow.  The interest rate you get from the lender will vary based on property, lender, credit bureau, employment, and personal situation.
  3. Amortization means the life of the mortgage, or how long the mortgage needs to be, in order to pay off the complete loan (principal) plus interest. Mortgage loans have different “amortizations,” the two most common terms are 25 & 30 years.  Within the life of the mortgage (amortization), you will have a Term.  The length of time that the contract with your mortgage lender including interest rate is set up (typically 5 years).  After your term completes, you can renew your mortgage with the same lender or move to a new lender.

WHEN TO GET A MORTGAGE

First Step: connect with me for a mortgage before you start hunting for a home.  You need to know what you can afford – especially with all the new government regulations.

Ideally, you need a mortgage pre-approval, which an in-depth process where a lender will check your credit report, credit score, debt-to-income ratio, loan-to-value ratio, and other aspects of your financial profile.

This serves two purposes:

  1. It will let you know the maximum purchase price of a home you can afford.
  2. A mortgage pre-approval shows home sellers and their realtors that you are serious about buying a home, which is particularly crucial in a hot housing market.

Types of Mortgages

How do you figure out which mortgage is right for you?  Here are the 2 main types of home loans to consider:

  1. Fixed-rate mortgage: This is the most popular payment set up for a mortgage.  A fixed mortgage interest rate is locked-in and will not increase for the term of the mortgage.
  2. Variable-rate mortgage aka Adjustable Rate Mortgages (ARM) A variable mortgage interest rate is based on the Bank of Canada rate and can fluctuate based on market conditions and the Canadian economy.  A mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the term.  These types of mortgages usually start off with a lower interest rate but can subject the borrower to payment uncertainty.

How to Shop for a Mortgage?

Use a mortgage broker, a professional who works with many different lenders to find a mortgage that best suits the needs of the borrower.

Brokers specialize in Mortgage Intelligence, educating people about mortgages, how they work and what lenders are looking for.  Everyone’s home purchasing situation is different, so working with me will give you a better sense of what mortgage options are available based on the 4 strategic priorities that every mortgage needs to balance:

  • lowest cost
  • lowest payment
  • maximum flexibility
  • lowest risk

Most Canadians are conditioned to think that the lowest interest rate means the best mortgage product.  Although sometimes that is true, a mortgage is more than just an interest rate.  You can save yourself a lot of money if you pay attention to the fine print, not just the rate.

Banks tend to concentrate on the 5 years fixed mortgage rate (since that’s the best option for them)… rates are important, however, I will look at the total cost of the mortgage.  I will advise & explain mortgage options, help you understand the implications of your choice and help you avoid the pitfalls of choosing a mortgage based on rates alone.

Contact Me Now 604-374-6193