Mortgages.ca

blog, Home Ownership, Mortgage Education

Should I Set Up a Home Equity Line of Credit?

Home equity lines of credit can be a financial lifeline when emergencies happen.

But waiting until retirement to set one up can throw homeowners a real curve-ball.

An older adult couple living in a million-dollar home called it quits on their careers after their mortgage was paid off.

They considered applying for a $600,000 home equity line of credit before retiring but decided against it in the end. They figured if they ever needed to access a large amount of cash, they could easily get it because of the equity they had in their home. A year later, they decided they wanted to spend less time in the city and more time enjoying the peace and quiet of lake life. They wanted to buy a cottage. 

Bad news came when they applied for a mortgage: their retirement income wasn’t enough to qualify. Had they secured that home equity line of credit before retiring, however, they could have used that to pay for their slice of heaven by the water.

Whether retirement is on the horizon or you have dreams of giving up corporate life for self-employment, it’s important to have the conversation with a professional about shoring up financial safety nets, including a home equity line of credit, before making the leap.

How does a home equity line of credit work?

A home equity line of credit is secured against the value of your home but approval is based on your income at the time you apply for it. 

You may never need to tap into it, but if you do, the interest rate with a home equity line of credit is better than with any credit card or unsecured line of credit. It really is the cheapest line of credit on the planet.

Paying off a home equity line of credit also comes with greater flexibility. The balance can be paid in full, unlike a mortgage, or you can choose to pay the interest only.

Home equity lines of credit also remain in place as long as you own your home.

When should you get a home equity line of credit?

Most people are never offered a home equity line of credit by their bank, but they should speak to a mortgage professional about applying for one as soon as they’ve built up equity in their home — and while they’re still earning a secure and stable salary.

The key is to be prepared for whatever life might throw your way, and that includes getting a home equity line of credit in place sooner than later regardless of career ambitions or retirement plans.

blog, Mortgage News

Getting a Mortgage During a Pandemic

Home buyers getting into the market and home owners looking to refinance wonder whether a new mortgage is possible right now.

It is, but with some caveats.

A recent first-time home buyer decided honesty was the best policy when he lost his job during the current COVID-19 crisis.

With just two weeks before the deal closed on his new home, he told his bank what happened. His parents co-signed on the mortgage and the deal moved forward, but the home buyer could have landed in serious financial trouble without that safety net.

He was at risk of losing his deposit and being sued by the sellers for money they would have lost had the deal fallen through.

Can I get a mortgage right now?

All this to say Canada’s large banks are still financing home purchases, even with an economy that’s all but halted. But they are being more conservative with their lending, says James Harrison, president and mortgage broker with mortgages.ca.

For starters, they’re no longer making exceptions on debt-service ratios and they’re eliminating discounts on prime and variable mortgages. Self-employed applicants will also have a harder time getting a mortgage with banks more thoroughly scrutinizing the industries in which they work.

Updated letters of employment are now essential for approval. Banks have started asking mortgage applicants for pay stubs up to two weeks before deals close, too, and they’re calling employers to confirm clients still have a job.

“Get your files in order,” Harrison advises. “Get your conditions met as soon as possible so there are no problems later and deals can close.”

Be prepared to wait.

Still, it will take longer for deals to be funded because banks are swamped right now. Mortgage applications were up 400 per cent when the pandemic started taking its toll economically, Harrison says.

Home buyers were taking advantage of low fixed rates at the time. Homeowners looking to refinance also jumped at lower interest offered after the Bank of Canada dropped rates.

Approval on financing can now take up to 10 days with clients waiting up to four weeks to get that cash in hand.

The key is to work with an experienced mortgage broker who can help navigate financing during these unprecedented times and get the best rates for homebuyers and homeowners in the process.

“It’s not the time to drag your feet and rate shop,” Harrison says. “Have the conversation with an experienced mortgage broker, know what’s out there and get your approval in place. Don’t be left in the dark because everything is changing so fast.”

 

Home Ownership, Mortgage Education

Understanding Mortgage Deferrals during COVID-19

Heres what you need to know about pausing your mortgage payments

Getting through to a bank can be a test of patience right now.

Those trying to connect to a bank employee have two options: endure the long wait time by testing your music trivia knowledge against the on-hold soundtrack or hang up.

If you choose to hang up, its important to try again at another time, particularly if youre calling to defer mortgage payments during the COVID-19 pandemic.

What is a  mortgage  deferral?

Canadas six largest banks offered to pause mortgage payments for those who lost work or faced financial hardship after COVID-19 slowed our economy to a grind.

Large banks are allowing customers to postpone their mortgage payments for six months, and so far, more than 210,000 Canadians have requested the relief.

Some smaller non-bank lenders are offering mortgage payment deferral programs, too, but they may only suspend payments for a shorter time.

The strategy is to get everyone to just stay home,says James Harrison, president and mortgage broker with mortgages.ca. The thought is in six months well be back up and running and can make payments. But in the meantime, people can use that money to buy groceries and keep the lights on.

Whatever the case, its important to speak to someone directly about halting payments to ensure you and your lender are on the same page. Dont let the frustration of being on hold cause you skip payments without permission, assuming your bank will understand why.

What are the long-term effects of deferring mortgage payments?

Your credit score will nose dive if you dont make it official with your bank that you need a break from your mortgage payments. So stay on the line or try again, no matter how long it takes. Approval is typically automatic once you do speak to a bank employee.

However, keep in mind you will have to start paying your mortgage again. Payments will be higher when you do, Harrison warns, because interest is still accumulating on your principal and on the interest you were already paying. Do the math to ensure your mortgage will be manageable when payments resume.

A lot of people think its interest-free for six months and the government is covering it,he says. Theyre not.

The good news is deferring your mortgage officially — shouldnt affect your credit score. But it is up to banks to let credit monitoring agencies know whats happening on your behalf. Given the average bank employees workload right now, its best to get that guarantee in writing or ask for the name and employee number of the person helping you in case you need that information later.

Otherwise, this short-term gain could lead to long-term credit pain.

Home Ownership, Mortgage News

Changes to the Stress Test – What it means for buyers

 

 

 

The government has come out with another mortgage rule change. This time the rule change may actually increase affordability for people looking to purchase a property with less than 20% down. Now before you start jumping for joy let’s take a look at the numbers and how they will work out for increasing your affordability.

Currently, and until April 6th, the rule as it stands right now would require any buyer, whether insured or conventional, to use the bench mark qualifying rate of 5.19% or their actual rate plus 2%, whichever is higher.


The new rule, as of April 6th 2020, will allow “insured” buyers to use their 5yr fixed rate plus 2% and that number can be lower than the bench mark rate.


Using RBC as our industry benchmark, who’s current rate is 3.09%, if an insured buyer were to purchase something, they would qualify at 5.09% (3.09 plus 2%), instead of the current benchmark rate of 5.19%.

As you can see this difference here is 0.10% and will have a little impact on affordability.

Here is a real life example:

Jane Doe makes 100k/yr and wants to buy a condo in Toronto that has monthly condo fees of $400/month and property taxes of $200/month.

If Jane Doe puts 10% down, here is how the old versus new rules would look for her

(For our example, assume Jane has great credit and Zero Liabilities)

Old/Current rule = qualifying at 5.19%.

-Maximum purchase purchase Price = 500k

New rule = qualifying at 5.09%
– Maximum purchase price = $510k

So while it may not be a huge increase, it is still a net positive, especially for first time homebuyers. Want to find out exactly how much you can afford?

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