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Mortgage Tip: Don’t Sign That Renewal Letter Just Yet!

Mortgages.ca broker James Harrison breaks down common borrower mistakes when it comes to mortgage renewal letters

Did you know: Over 80% of borrowers will sign a mortgage renewal letter that they received in the mail without a second thought? These rates are typically over half a percent higher than the going rate.

A 5-minute conversation with a trusted mortgage professional can potentially save you tens of thousands of dollars! Take your renewal letter to a Mortgages.ca broker and get the assurance you deserve.

blog, Mortgage Education

Everything You Need To Know About Purchase-Plus-Improvements

By rolling the costs of renovation into a purchase-plus-improvements mortgage, you can make a good house GREAT

Photo Credit: Mark McCammon

By Steve Harrison
Mortgages.ca

Looking at buying a home that could use an update? A purchase-plus-improvements mortgage might be exactly what you need.

These amazing customized mortgages allow you to make home improvements as soon as you move into your new house, rolling into your mortgage the costs of value-enhancing changes. That means you could replace the floors, update a bathroom, or replace old electrical such as knob and tube — whatever improvements an almost-perfect property needs to make it even more beautiful right now.

Affordable financing

We recommend purchase-plus-improvements mortgages to our clients because, while there are limits on what you can do, these loans are the most affordable way to finance a renovation — and you get to live in your upgraded home right away.

One of our clients, Brian, bought a place in Oakville and decided to utilize the Purchase Plus Improvements Mortgage.

“The best part of financing through this option was the ease of use and the ability to do a major renovation by adding a small amount to each mortgage payment,” Brian wrote in an email recently.

A purchase-plus-improvements mortgage means that home buyers are free to fall in love with a home that has almost everything going for it. An extremely dated bathroom or a roof that needs replacing doesn’t have to be a dealbreaker.

We decided to buy a home we knew we would need to do a significant amount of work on because of the option to do mortgage plus,” said Brian.

They redid their kitchen with new cabinets, flooring, lighting, plumbing, and electrical, as well as their basement, with new flooring and a four-piece bathroom, plus new bay windows and smart home upgrades. Pretty sweet.

This approach makes perfect sense because of today’s historically low mortgage rates. A mortgage is the cheapest way to borrow. An additional $40,000 on your mortgage will cost you far less than borrowing $40,000 on a line of credit — a common financing option you might consider if you decide to put the renovation off until later.

The 90- to 180-day timeline on these mortgages means you and your contractor must be prepared to finish renovations promptly. But the timeline is partly what makes it so awesome: You improve the value of your home and you get to live in it right away.

The exact timeline will depend on your lender, and a mortgage broker can help you navigate the options.

Brian notes that planning and communicating was important in the process. “It was important to let the contractors know the timelines, so everyone is aware of expectations,” he said.

The maximum amount you can borrow for improvements can vary, but for most home buyers, $40,000 is the base amount. In some cases, a knowledgeable mortgage broker may be able to help you get approval for more.

Here’s how it works

First, you’ll work with a broker to be pre-approved for your maximum amount.

After you find a home and your purchase offer is accepted and the mortgage is approved, you’ll get estimates for improvements you want to make. Your broker can pass the estimates to your lender for approval.

Photo Credit: Pixabay

If your lender agrees that your planned renovations will indeed improve the value of your home, they’ll send your broker an approval for the revised amount of your mortgage — the purchase price, plus the costs of renovations.

On your closing date, the amount approved for your renovation will go to your lawyer, to be held until you’ve completed the proposed renovations. You’ll receive the funds when your renovation is complete.

That means you must pay up-front costs of your renovation from your pocket. Some of our clients have used a credit card or a line of credit to get through the period of renovation.

After an appraisal confirms that your renovations were completed within the agreed upon amount of time, your lawyer can release the funds to you.

It’s important to note that your minimum down payment will be calculated based on the total amount of your home’s assessed value — the purchase price plus the price of the approved renovations.

Types of improvements that are likely to be approved by lenders:

  • Roof
  • Flooring
  • Wiring
  • Windows and doors
  • Energy efficiency
  • Basement
  • Kitchen
  • Bathroom
  • Living room

Purchase-plus-improvements mortgages are the most affordable way to finance home improvements. That’s why we love them, and why you should, too!

 

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Everything You Need To Know About Monoline Lenders

These mortgage-only credit companies offer lower rates and better terms than big banks

Monoline lenders via Mortgages.ca

Monoline lenders only offer their services through licensed brokers

By Scott Nazareth
Mortgages.ca

At mortgages.ca, we work with a variety of types of lenders, including banks, credit unions, trust companies and monoline lenders.

Never heard of monoline lenders? That’s no surprise. Also sometimes known as non-bank lenders, they work exclusively through mortgage brokers and don’t typically market themselves to consumers, so their names may seem unfamiliar at first.

What is a monoline lender, exactly?

These lenders only deal in mortgages. They don’t offer other services or types of credit. Nor do they maintain physical branches, instead offering service online or by phone.

What’s so great about them?

Because they have low overheads and streamlined business models, monoline lenders can usually offer lower rates than the big banks. That’s why mortgage brokers like them, and you should, too.

One other major factor that sets monoline lenders apart from big banks is their penalty structure on fixed rate mortgages. Monolines use a different formula than banks to calculate exit penalties.

So if you end up breaking your mortgage, the penalty on a monoline mortgage can be thousands of dollars less than that of a mortgage with a bank.

You may not plan to break your mortgage, but unexpected life events can get in the way of plans. According to this Globe and Mail article, about 70 per cent of borrowers must make changes to their five-year fixed rate mortgages before maturity because rates have dropped, or they’re moving to a bigger house, or their financial situation has changed.

Have I heard of these companies?

Probably not. That’s because they market themselves to brokers, rather than consumers.

Perhaps you’ve heard of First National, Canada’s largest monoline, and MCAP, the second largest. But you’ve probably not heard of RMG, CMLS, or some of the smaller lenders we work with.

Still, that doesn’t mean they aren’t reputable. Many have been around for decades, and a bit of internet research will reveal their legitimacy.

Secure monoline lenders via Mortgages.ca

A bit of internet research will reveal that monoline lenders are strictly regulated, just like the big banks.

Are they secure?

Yes. Just like the big banks, monoline lenders are strictly regulated. In fact, they’re required to follow the same lending guidelines as the majors.

They’re not in the business of giving loans to high-risk borrowers. In fact, all monoline lenders secure their mortgages with insurance from one of Canada’s three mortgage insurers.

That low-risk business model means there’s little risk to the borrower if a monoline lender were to cease operation. As when Scotiabank took over ING Direct in 2012, another lender could simply take over the purchased company’s insured mortgages. There would be no impact on borrowers.

Is it right for me?

Some borrowers prefer to work with big banks and trust companies because they’re familiar with a company’s name and reputation. That’s understandable.

But if you’re interested in finding the best mortgage for your needs, you’ll need to open your mind to borrowing from a lesser-known lender. This may require a bit of research, as well as independent advice from a mortgage broker, who can help you understand how each product’s terms may affect you.

You’ll need to read the fine print on penalty calculations, portability, refinance limitations and more. The strings attached to some monoline mortgages can be onerous, but that’s true with loans from banks, credit unions and trust companies as well.

Want to learn more?

The mortgage landscape can be confusing. As independent mortgage brokers, it’s our job to educate you about the many options offered by the many lenders in Canada. We work with home buyers and major lenders to find our clients perfectly matched mortgage products.

Ready to get started? Go to our online application form.

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Despite an interest rate hike, variable mortgages are still a smart investment

This morning, July 11, 2018, the Bank of Canada increased its overnight rate by 0.25 per cent to 1.5 per cent. It was the first rate hike in six months, but bank’s fourth increase over the past 12 months.

The overnight rate — what major financial institutions charge each other for a one-night loan — is a trendsetter. It leads financial institutions to raise prime rates, which means Canadians will be paying higher borrowing costs on such products as variable-rate mortgages.

For mortgage shoppers, there is absolutely nothing to fear in this news. With a new prime rate of 3.7 per cent, we are still highly recommending variable mortgages to our clients.

We’re saying: Do not lock in, and do not take a fixed rate. Here’s why:

The average spread between a five-year fixed mortgage and a five-year variable mortgage is now around 1 per cent.

So the prime rate would have to go up by 0.25 per cent eight or nine times more for you to be paying more interest on your variable-rate mortgage over a five-year term, when compared to a five-year fixed-rate mortgage.

The rule of thumb is: If the spread between a five-year fixed and a five-year variable is 0.5 per cent or more, go variable.

Consider the penalties

It’s important to note that the penalty on a five-year fixed mortgage is, on average, about nine times greater than that of a variable mortgage.

The average bank penalty to break a five-year fixed is approximately 4.5 per cent of your outstanding balance. So, for example, on a $400,000 mortgage, that would be a penalty of $18,000.

Compare that to the $2000 penalty on a variable-rate mortgage. It’s a massive difference.

Pay down your principal

We recommend our clients take a variable mortgage, but that they make payments as if they went fixed. So an additional $300 or 400 a month goes towards paying off the mortgage principal and not to the bank in interest.

We help clients build a plan so they can save thousands and pay off their mortgages faster. And in our view, it’s still a no-brainer to go variable.

Banks will always recommend locking in. In times like these, they’ll encourage clients to take a fixed rate product. But did you ever wonder why?

It’s because fixed rate mortgages are very profitable for the banks. The five-year fixed product is one of the most profitable mortgage products ever sold. And with massive penalties, it locks the client in.

Since about 60 per cent of clients break their mortgages, it almost never makes sense to go fixed. None of them plan to break their mortgages. But it happens. And we don’t like to see our clients slapped with big penalties when they’re facing unexpected life changes, so we advise against fixed-rate mortgages.

Back when we had five-year fixed rates at around 2.59 per cent or lower, there was a good argument for locking in. But those days are now gone.

Speaking with an experienced mortgage broker can help you define and realize your financial goals amidst a changing economic landscape. Call or email me any time with questions you or your clients might have about mortgages.

Mortgage Education

New “Universal Stress Test” FAQ’s:

With the formal announcement less than 24 hours old (on the mortgage rule changes that are coming into effect January 1, 2018), we have already seen a flood of questions coming in from realtors and clients alike….So, I thought I would take a moment and share the more common one’s with you:
Read More…

Home Ownership

Tips to get your finances on track in 2017

finances on track in 2017With a new year comes new beginnings and new resolutions. Some resolutions are professional, like getting a raise or job promotion. Other plans, such as a long-anticipated vacation, are on the fun side. Either way, planning, completing and checking off most of your goals involves sorting out your personal finances.

Listed below are tips to help you turn your financial plans into solid actions. Read More…

Home Ownership, Mortgage Education, Mortgage News

Understanding Accelerated Payments

accelerated paymentsAn increasingly popular way Canadians choose to pay off mortgages before their amortization period expires is by making accelerated payments. Owning a home and paying off a mortgage takes the average Canadian household between 20-25 years.  However, a salary raise, job promotion, being prudent spenders, or an inheritance can help interested couples use their newfound capital to shorten that time. Read More…