Has your bank turned you down for mortgage financing?
You are not alone, for as long as the mortgage industry has been around, rules and regulations have put a cap on affordability and increased scrutiny and due diligence to reduce risk for lenders. In the most recent years, the stress test has reduced purchasing power across the board for all borrowers by creating a buffer between the contract rate of the 5 year fixed product and the MQR or mortgage qualifying rate which is meant to model affordability based on a future rise in rates. The MQR is now determined dynamically every week based on an average of the 5 year fixed posted rates across the top 5 banks in Canada (TD, BMO, RBC, Scotiabank and CIBC).
The spread between the contract rate and the MQR is currently sitting at more than 3% for high ratio purchases. This means that if you were to lock in to a 5 year fixed today on a 500k mortgage, you would need to qualify to carry a payment of $2849/month (MQR) vs $2020/month (1.59%).
Debt servicing ratios are used to determine how much of your outgoing monthly liabilities and total debt correlate to your total monthly income. For banks, credit unions and AAA lenders the ratios are 39/44 (GDS/TDS). The ratios are determined by your ability to carry your monthly mortgage payments (based on MQR), your other liabilities like car loans, credit card debt, relative to your income. For unsecured/revolving loans, like a credit card or line of credit lenders will factor in a carrying cost of 3% of the outstanding balance for servicing ratios. For example, if you owe $15,000 on a line of credit, your monthly carrying cost would be factored in at $450/month.
So where did this 39/44 (GDS/TDS) ratio come from? The mortgage default insurers, CMHC, Sagen (previously Genworth) and Canada Guaranty. When purchasing with less than 20% down your mortgage in the majority of cases must have mortgage insurance. When purchasing with more than 20% down, if the mortgage is amortized at 25 years or less, which is the limit for default mortgage insurance – the lender may opt to purchase this for you, at their cost.
At Alternative Lending institutions, lenders will typically allow higher debt servicing ratios giving you more affordability to purchase or refinance. Ratios typically are 45/50 (GDS/TDS) but can be as high as 55/70 (GDS/TDS) depending on factors like net worth, loan to value ratios, and uncaptured income. The more skin in the game or equity you have, the better negotiating ability you have with an alternative lender. Based on these ratios alone your affordability can increase as much as 20%.
Amortization is the total length of time calculated to payback the loan, it’s the time frame your mortgage payment is based on. At banks, credit unions, monolines and other AAA lenders the maximum amortization period is now capped at 30 years for mortgages with a minimum of a 20% down-payment and a cap of 25 years for a downpayment of less than 20% requiring default mortgage insurance. Did you know that in the past even high-ratio mortgages with less than 20% down used to be amortized up to 40 years? The longer the amortization period, the more purchasing power an individual has due to the lower carrying cost of the debt.
Alternative Lenders can offer amortizations up to 35 years and in some cases 40 years to reduce your mortgage payments and in turn increase your affordability.
Employment Income Guidelines
Permanent full time employees with a base salary or guaranteed hours can utilize all of their income in most cases to qualify as long as they have at least 3 months of continuous employment and not be on probation. However, as we know, the job market and nature of work has changed to include many different types of income. Employees on contract, seasonal workers, self employed persons with less than 2 years of employment, self employed persons who take advantage of tax strategies to reduce taxable income, low-income high net worth individuals and more, face scrutiny and sometimes an outright decline based on the fact they do not fit the parameters of a big bank, credit union or other AAA lender. The risk parameters baked into the underwriting guidelines at these lenders create an opportunity for other products/solutions to address this market need.
Many self employed individuals previously were allowed to take advantage of Stated Income Programs designed to help cash businesses/self employed entities whose taxable income did not reflect the true return from their business activities. Alternative lenders have embraced the stated income program to allow a self employed individual to use as much of their GROSS income before deductions/taxes as is reasonable to qualify. Alongside the higher debt servicing ratios and longer amortization periods this is an optimal solution for self employed individuals.
Aside from employment income, there are other types of income that are accepted such as the Child Tax Benefit,Disability Benefits, Spousal Support to name a few at both AAA and B lenders. As we have noted however, there are stricter guidelines for use of this income, such as the percentage of total income allowed for Spousal Support (capped at 30%) or the minimum age required for the children to use the CCB (capped at 12 years). B-Lenders offer more flexibility here as well.
Mortgage Hack: B Lenders allow for contributory income from non-title owner occupants of a property, such as a sibling, spouse, grandparent etc. If you are in a situation where you are buying a house occupied by a family, and lets say your sister contributes $300/400 a month from her part time job to the expenses, AAA lenders will require her to be on the application to use the income, some B lenders will allow up to $500/month to be added for persons that are not on the application.
Rates, Rates, Rates – it’s all we hear about on the news and in regular discourse. Rates are low! Rates are going down, rates are going up etc. At the time of writing, the 5 year fixed rate average is about 1.89% across both high ratio/conventional files spanning multiple products and lenders. Now, being in the mortgage industry for over 7 years, many of my clients are surprised to learn that interest rates are not customized based on a client’s credit profile. If you have Tom with a 700+ beacon score getting a mortgage and Sally with a 880 beacon score getting a mortgage, they will likely be offered the same rates. Rates are sometimes determined by minimum thresholds related to credit scores, for example (620- 680) will have a rate at 1.89% whereas 680+ will be 1.79%. However within the ranges, there is no further tailoring regarding rates.
The ranges in a rate matrix exist for B Lenders, where the higher your credit score, especially if its above 700+ will provide you the best rate, and the lower you go, the rates become more case-by-case, based on the risk to the lender. Beacon scores less than 525 at most lenders are entirely priced on a case-by-case basis. For applicants on the higher end of the rate spectrum we are seeing rates as low as 2.74% for 1-2 year terms. Pretty good right? Let’s talk fees…
When arranging a mortgage at a bank, you are typically not charged any fees aside from the appraisal cost and perhaps account fees for banking products you choose to bundle in with your mortgage. A mortgage broker that facilitates a mortgage with you and a bank will receive a finders fee and is compensated fully by the lender. Alternative lenders do not provide the same compensation to brokers, in most cases, brokers will charge a broker fee. This broker fee can range depending on the complexity of the deal from 0.5% to 2% of the outstanding loan amount and is deducted from the advance of funds on closing.
In addition to a broker fee, lenders will typically charge a lender fee ranging from 0.5% to 1.5% depending on the product selection/risk parameters. Alternative Lenders/B Lenders unlike banks normally see their clients choose short term mortgages, between 1-3 years mostly. An exit strategy is discussed up front in most cases how to transition from a B Lender to an A Lender. This means less profit for the lender, so they have incorporated fees into their business model to account for the additional risk they face when underwriting files more leniently.
Working with the professionals at Mortgages.ca provides you access to a myriad of products and solutions. We create custom mortgage solutions for our clients and unlike your bank or financial institution we can offer you products from multiple lenders that may be able to help you achieve your goals faster than if you were limited to the product selection from one lender. We work with over 50 lending institutions, from big banks to private lenders and everything in between.
Contact us today if you want to find out the optimal way to maximize your affordability and take advantage of the opportunities in your local real estate market. Whether a long time employee or newly self employed we will be here to help guide you through the process, educating you along the way. Don’t just take it from me, check out the testimonials from some of our clients to hear what they have to say 🙂