So you are looking for the best mortgage rate possible as well as how much you can afford. You are still undecided between the fixed and variable rate. Your mortgage broker tells you how much of a mortgage you can afford at the variable rate and the fixed rate…..but wait a second…..the amounts are different. Not only that, the variable rate option is a smaller mortgage amount even though the rate is less. How can that be?

The answer is quite simple. When a lender qualifies you for a mortgage with a term of 5 years or greater, they use the contract rate to determine the affordability. In other words they use the rate quoted on the commitment. This is not the case for variable mortgages or terms less than 5 years. In these cases they use the MQR (Mortgage Qualifying Rate) rate which is the 5 year posted rate. So even though the quoted rate for a variable might be prime less .70% (currently 2.05%) they qualify you based on 5.49% (the current 5 year posted rate).

Why do Banks use different rates to qualify my mortgage?

Lenders (and the Bank of Canada) want to be sure that you will still be able to afford your payments when/if interest rates increase over the life of your mortgage. We have all seen what happened in the United States when people were qualified at super low teaser rates and then could no longer make their payments when their rates adjusted upwards. That is less likely to happen in Canada since your variable rate would need to double before it moved above your qualifying rate. Of course there are no guarantees rates will never move higher than your qualifying rate, but atleast there is an extra measure of safety.

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The benefits of using an experienced mortgage broker become more obvious in certain financing situations…..poor credit, new to Canada…self employed…..and finally, buying a rental property. How much of a down payment do I need? How much of the rental income can I use? Does the basement apartment need to be legal?

The rules around financing a rental property can be significantly different than those that are in place for purchasing a primary residence and having access to a knowledgeable mortgage broker can certainly help. There are several different products available from various lenders and they all have specific guidelines.

How Much of a Down Payment Do I Need?

As of last spring you now require 20% to purchase a rental property with 1-4 units. Gone are the days of purchasing a rental property with only 5% down. If you purchased a rental property with 5% down before the new rules took affect this year, but have not yet closed on it…..you are going to have to come up with the additional 15% or risk losing the property. This mostly applies to those who purchased a new build condo with the intent to rent it. If you were lucky enough to get an approval with a CMHC policy number when you purchased the property, CMHC will honour the approval. I have encountered a few clients who were caught by the new regulations and were forced to refinance their principal residence or choose a mortgage option with a higher interest rate to close on their new rental.

How Much Rent Can I Count?

In most cases 50% of the rental income is counted toward the total income on the deal. In some cases if the owner of the property is going to live in one of the units the lender will count 80% of the rental income. Again, this is where your mortgage broker with an in depth knowledge of invest property products can be extremely valuable. You also need to remember to account for property tax and heating costs when calculating your ratios.

It certainly has become more difficult to invest in real estate in Canada. The new rules were meant to control real estate speculators and I think it has accomplished that. In my opinion real estate is a great investment and should be a part of a balanced portfolio and I don’t think it is such a bad thing that you now need to have a bit more skin in the game.

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I have been a loyal mortgage client with my bank for the past 5 years….they would only offer me there best rate upon renewal right?

WRONG….Many Canadians believe their loyalty will translate in to preferential rates when it comes time to renew, but nothing could be further from the truth. Banks know that 85% of Canadians will sign their mortgage renewal notice without even looking around to make sure they have the best rate. Why would the bank offer their lowest rate when they can offer an inflated rate without any push back? in fact many times a stranger walking in to a bank branch looking for a mortgage will get a better rate than the long term client looking to renew.

This does not have to be the case. Get in touch with your mortgage broker 3-4 months before your mortgage renews so he/she can start shopping around for the best rate. At the very least you can get a rate hold for 4 months to protect you in the case of rate increases before your actual renewal. Also take a moment to think about how your situation might change in the coming years. Will your family be growing? Will you need money for renovations or a child’s education? If so now is the time to include these changes in your mortgage. Does your bank take the time to help you plan financially for the next 5 years of your life? Probably not.

All of this being said, I do use the big banks for a large portion of my clients and really do not have anything against them. All I am saying is it is your money, manage it wisely.Your mortgage is probably the single biggest piece of debt you have so it is worth a little extra effort to make sure you are getting the lowest rate possible and the mortgage product that best suits your needs.

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So you have your mortgage pre-approval or approval and you think you have a guarantee from the bank for your financing….Wrong! Most people do not realize nothing is guaranteed when it comes to mortgages and the piece of paper you have in your hand is nothing more than an outline of what the bank is willing to offer.

There are a few mistakes some home buyers make that can put their financing in jeopardy:

1. Shop around your mortgage or accumulate other debt. I have said it a million times, but one of the most damaging things you can do to your credit is have too many people look at your report. This raises a red flag for the lenders and gets you labeled as a “Credit Shopper”…..someone who is trying to accumulate as much credit as they can. Even if you were just looking for ONE cell phone contract, but went to 4 different providers, it still is very damaging. I have had clients who have been pre-approved, but then could not get approved because they went shopping for credit.

2. Make a major change to your employment situation. Try and plan any major career moves around your mortgage. Don’t get approved for your mortgage and then decide to quit your job a week later. If the lender finds out they can refuse to fund the mortgage. Normally if you are switching to a new company, but are in the same line of work the lender will understand, but technically you need to be past your 3 month probation before they feel comfortable lending you the money. Where most people tend to get into trouble is when they quit their job to become self employed or an independent contractor. You might be in the same industry, but you do not have a history of being self employed and this scares the lender.

The moral of the story is try to keep your employment and your financial situation constant until the mortgage closes. Of course there will be circumstances where this is not possible so speak to your mortgage broker about the best way to package the news for the lender. It could mean the difference between getting the mortgage or not

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Why Do I Need a Home Appraisal?

Depending on your mortgage lender and how much money you are putting down, the lender may or may not require an appraisal on the property. First, let’s talk about what a home appraisal is. Your lender is giving you hundreds of thousands of dollars and wants to be confident that the asset (your home) which is securing the loan is worth what you say it is. They want to be sure if they ever need to take back your property in case of default they are going to be able to sell it for atleast enough to cover the outstanding loan and any fees incurred with repossessing the property.

In most cases if you are putting down less than 20% and the mortgage is insured (via CMHC or one of the other insurers) there will not be an appraisal required. The insurer has a computer program that will verify the value of the house. In certain cases the insurer might still require an appraisal, but they will cover the cost.

Appraisals are more common in cases where the client is putting don more than 20% and the lender does not have the security of having the mortgage insured. They want to be 100% sure they are not taking on any uneccessary risk by lending on a property that is not worth enough.

…but I am getting a home inspection…does that count?

A home inspection is very different from an appraisal. A home inspector will spend hours going through the property to make sure there are no major structural/plumbing/electrical issues with the property. A home inspection is meant to protect you and not the lender. A home appraiser will not provide any opinion on the value of the property and therefore is of no use to the lender. That being said it is always a good idea to get a home inspection before you buy any property

A home appraisal is solely for the benefit of the lender. The appraiser will spend 10 minutes in the property looking around and taking pictures. They will usually only find obvious problems with the property and spend most of their time noting the finishes in the home. The second part of the process involves looking at comparable properties that have sold in the area in the last 60 days and what they sold for. This will allow him to com up with a comparative value for the property.

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So you have bought your first house and now you need a mortgage. You find a qualified Mortgage Broker in your area and he gets you a great rate……what’s next?

Well, the lenders are going to require proof that everything you told them about yourself is true. The world would be a much simpler place if they would just take our word for it, but unfortunately life isn’t that easy. But don’t worry, most of the documents you need to provide are quite easy to find. Keep in mind this post is dealing with a purchase, but you will most likely need to provide the same pieces of information for mortgage refinances and renewals.

Proof of Income

Your income is obviously one of the main things the lender needs to feel comfortable with before they hand over their money. They want to be sure the income on your application reflects reality and you are not going to default on the mortgage.

Salaried employees will need to provide a job letter from there employer as well as 1 or 2 recent pay stubs. If a large portion of your income is comprised of bonuses and you need to count those bonuses in order to qualify, the lender will most likely want to see your 2 most recent Notice of Assessments to see the total income you claim.

If you are self employed you will most definitely need your 2 most recent Notice of Assessments as well as proof that you are self employed in the form of GST/HST returns, articles of incorporation and/or business licence. There are actually a couple of different mortgage types a self-employed individual can get. One involves using your actual income and the other involves stating your income. I will get in to more detail in a future post on these types of mortgage.

Proof of Downpayment

The lender is also going to want proof that you have the money available to pay for your down payment. Also keep in mind most lenders will require proof that you have money for the closing costs for an amount of 1.5% of the purchase price. Be ready to provide 3 month’s worth of bank or investment statements showing the money has been sitting in your account. If it is gifted from a family member you will need to provide a gift letter as well as proof the gift has been deposited in your bank account and is available to use.

You will also need to provide a void cheque for the account you wish your payments to be withdrawn from. One of the most common situations I run into is young couples buying their first home and planning on opening a joint account. Keep in mind the lender will not accept a cheque that does not have your name and address printed on it. I have yet to get them to accept one of those blank cheques you are issued when you get a new account. Plan ahead and open that account as soon as you start seriously looking for your house.

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How much time do I need to complete my mortgage?

One of the biggest things that most of my clients do not realize is that it takes time to get a mortgage. Contrary to to what some people believe (you know who you are) you can not walk into a bank on a Tuesday and expect to have a mortgage on Wednesday. There is a certain amount of due diligence the lender wants to to do on you and the property…..and this takes TIME. I’m going to lay out the steps and associated timeline for a mortgage below in the hopes that the small percentage of society that calls me up every week looking to fund a mortgage in 2 days will see it and take it into consideration the next time they need a mortgage. I am going to lay out the steps for purchasing a house, but it will also be approximate for refinances and switches. And of course always get your mortgage pre-approval before you go house hunting

Step 1 – Approval (time to complete: 1-2 days)

Once you have an accepted offer make sure you or your agent fax a copy of the signed agreement and MLS listing to your broker. This si waht I use to get all of the particulars of the house and the deal and allows me to send the file to the lender to get an approval.

Step 2 – Fulfill Conditions (time to complete: 3-4 days)

Once we get the approval back from the bank there will be a list of conditions that will need to be satisfied such as proving the downpayment and your income. In my next post I am going to talk a bit about all of the documents you will need to provide to complete your mortgage, but for now all you need to know is you are going to probably have to provide a letter from your employer, paystubs, possibly tax returns etc. You will also need to set aside an hour or so to sit down with your broker to walk through the fine print of the mortgage and sign all of the documents required.

Step 3 – Appraisal (time to complete: 2-4 days)

This step is usually done at the same time as step 2. Depending on the lender and if the mortgage is going to be insured you may or may not even require this step. Unfortunately you are at the mercy of the appraisers schedule at this point. If he/she is busy it could take a week for them to view the property and write up the report. If you are lucky enough to find an appraiser that is slow, they can normally get it done in a couple of days. I will talk more about appraisals in a later post.

Step 4 – Sign at the lawyers Office (time to complete: 10 days)

The final step of any mortgage is signing the final legal documents at your lawyers office. For this to happen your lawyer needs to receive a package from the lender (usually about a week before) so they can draft the final papers for you to sign. One of the most import numbers to remember is 10. Most lenders will require atleast 10 days between the time they receive all of your supporting documents and the closing day of the mortgage. This gives them enough time to send your lawyer the info they need and have the mortgage close on time.

Please make sure you have atleast 2 to 3 weeks for your mortgage from start to finish. It makes the experience far less stressful for everyone involved and will give you access to more lenders since some will refuse to even look at a deal that doesn’t have atleast 2 weeks until closing. Of course exceptions can be made in certain circumstances and mortgages can be rushed through the process in 5 days, but lenders do this with great hesitation and very few will do it at all.

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If you are like most Canadians you are probably not familiar with Reverse Mortgages, let alone the possible benefits. Reverse Mortgages have been available in Canada for years, but have not been a popular solution due to the higher interest rates associated with this product and the fear of losing the equity in your home. I am going to attempt to explain how this might be a product that could help you or someone you know enjoy their retirement.

First, let’s talk about what made this product less than attractive in the past. Quite simply it was the interest rate. In the past you could expect to be paying 8-10% in interest. Over time this would definitely add up and significantly erode your equity in the home. The Canadian Home Income Plan became a chartered bank earlier this year giving them access to much cheaper funds. This results in you getting a rate that is currently around 4%. This now becomes a much more attractive solution.

What is a Reverse Mortgage

A reverse mortgage gives you access to the equity in your home without the need for making monthly payments like a conventional mortgage. If you are over 60 years old you can borrow up to 40% of the value of your home and you do not need to make a single mortgage payment as long as you or your spouse live in the home.

How does a Reverse Mortgage Work?

It is quite simple. The Canadian Home Income Plan lends you up to 40% of your home’s value. This money can be used for whatever you need it for…..vacations…living expenses….etc. The funds are tax free and does not affect your old age pension or guaranteed income supplement. You can take the money in a lump sum or set up a planned advances for a set period of time. Since you are not making payments the interest keeps accruing to the mortgage and will not be paid until you sell the house or your estate can remortgage the property if they wish to keep it.

Is a Reverse Mortgage Right For Me?

It could be. As more retirees are carrying larger amounts of debt in to retirement they are finding their fixed incomes are being stretched and they are not leading the retirement they dreamed of. A Reverse Mortgage is a great way to consolidate debt and your current mortgage and not have to worry about making monthly payments. This will allow you to free up your cash flow to spend on living your dream retirement.

If you would like to learn more about Reverse Mortgages or any other mortgage solutions please feel free to contact me.

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There are a few common credit mistakes that I see people make over and over again. It is possible to never miss a payment on any of your loans and still have a poor credit score. So what is this common mistake……credit shopping. Most people do not realize that the more often your credit bureau is viewed by lenders the more damage you are doing to your credit score.

How Much is Too Much?

There is much debate about how often your credit can be viewed and how much time between viewings must pass in order to maintain a solid credit rating. The credit rating agencies such as Equifax and Transunion to not make this info available to the public, so it pays to use common sense. Obviously the rating agencies realize that most people will probably have their credit viewed a couple of times during the year. You can’t get a cell phone or a Future Shop credit card without your credit being viewed so I wouldn’t worry too much about occasional credit checks. Where most people get in to trouble is when they are shopping for things like a mortgage. They will go from bank to bank trying to find the best rate and the best product, but they don’t realize (or don’t care) that their credit bureau is being pulled every time they submit a new application. If you have 3 or 4 credit viewings over a 3 week period you can be sure this will have a negative impact on your rating.

Be sure to do your due diligence and research before you fill out the application. Better yet use a mortgage broker that only needs to pull your credit report once and can submit that report to as many lenders as needed.

I Have Bad Credit…. Can I Still Get a Mortgage?

Probably. There are several lenders out there that can provide you with the mortgage you need. Keep in mind you are going to be paying a higher interest rate and will probably be required to put down atleast 15% of your own money for a downpayment. It is also helpful if you can get a solid co-signor to help strengthen the application. Often times a parent or sibling can cosign on the mortgage and if their credit is solid it can give the lender a greater comfort level with lending you money.

If you have any questions or would like to discuss your credit situation, please feel free to contact me. I have helped countless individuals with damaged credit just like you.

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