Mortgages.ca

blog, Mortgage Education, Mortgage Refinance

The Smart Homeowner’s Guide to Refinancing

Mortgage refinancing is a tool you can use to improve your financial future

smart-homeowners-guide-to-refinancing

By Steve Harrison
Mortgages.ca

 

Over my 10 years in the mortgage industry, I’ve noticed that homeowners who refinance strategically can significantly improve their overall financial situations.

And you can do it, too. By refinancing whenever the math makes sense, you can make incremental gains that add up over time.

 

Why you should care about refinancing?

Whether you’re considering this option now or not, it’s important that you understand the basics. That way, when you’re faced with an unexpected financial challenge in the future, or an investment opportunity comes along, you’ll have a clear understanding of how your home equity can help you achieve your goals. The more you understand the short and long term benefits of refinancing, the more financially proactive you can be.

 

What is refinancing?

Refinancing is the process of ending a mortgage agreement in order to replace it with a new one. The first loan is paid off in full and a new loan is created, either with a new lender or the existing lender.

Whereas a straight switch to a new lender (also known as a transfer) can change only the interest rate or term of a mortgage, a refinance can involve increasing the total amount of the loan and/or changing the length of amortization.

 

Why refinance?

  • To Consolidate Debt

We often recommend our clients to refinance in order to consolidate other forms of debt they may be carrying. A mortgage is the cheapest way to borrow money, so it’s often beneficial to transfer accumulated debt — from credit cards, lines of credit, student debt, car loans — to a mortgage. This way you can avoid paying the higher rate of interest on those other forms of debt.  

  • To Access Home Equity

When clients need to take cash from their home equity, refinancing is the way to do it. This is a cheap way to access cash for investing in a rental property, sending a child to university, doing a major renovation, covering unexpected medical costs, or starting a business. Canadians can access up to 80 per cent of the value of their home by refinancing.

  • To Achieve Long Term Goals

In some cases, refinancing can help homeowners increase their long term wealth. For example, refinancing could make it possible for a homeowner to move from their starter house or condo into a new home, while keeping the starter home as an investment property, thereby increasing their net worth over time.

Other benefits include:

  • Access lower rates when rates have dropped
  • Lower monthly payments
  • Add a home equity line of credit

 

Should-I-Refinance

When should I refinance?

When your mortgage term is up, you have three options:

  • Renewing the loan with your existing lender at a similar rate with a similar term
  • Transferring your loan to a new lender at a different rate or term
  • Refinancing

When the math works out to your benefit, it’s a good time to refinance.

Unfortunately, if you have an immediate need access to your home equity, you can’t wait for the ideal time and you may be forced to break your existing mortgage. In that case, you’ll need to pay the penalties involved with breaking your mortgage. Pre-payment penalties can be significant, depending on the size of your outstanding mortgage. Still, despite penalties, it can still be beneficial to refinance.

Lenders sometimes offer refinancing promotions in which they pay the costs when you move your loan to their institution. A mortgage broker can alert you to those promotions and advise about whether the lender offering them is the right one for you.

 

What are the costs of refinancing?

The costs of refinancing include:

  • If you’re breaking your mortgage, prepayment penalties will apply (amounts vary)
  • Lawyer fees ($800-$1500)
  • Discharge fees ($300-$400)
  • Appraisal ($300-$400)

Occasionally, lenders will offer promotions in which they pay the costs associated with refinancing. Your broker can inform you of these temporary offers if they apply to your situation.  

 

Do I have to qualify for refinancing?

Yes. You’ll have to apply for a new mortgage, going through the process of providing proof of income, statements of debts and assets, and credit scores to your new lender.

 

Is there a downside to refinancing?

If there is a risk to refinancing, it’s the temptation to continue adding to consumer debt after consolidation. Lifestyle changes are sometimes necessary in order to avoid having to refinance again.

 

What are the steps to refinancing?

Though some see refinancing as time-consuming, I try to make the process as simple as possible. Here’s an overview of the steps to follow with your mortgage broker:

  1. Review your financial situation and goals
  2. Find the right refinancing loan
  3. Review documents
  4. Apply for the new loan
  5. Await review of your application by the chosen lender
  6. Once mortgage is approved, broker orders an appraisal
  7. You sign the loan commitment
  8. You see your notary or lawyer, who will oversee the loan disbursement

 

Advice is always free. Call or email us to set up a consultation anytime.

E: Info@Mortgages.ca
P: 647-795-8700

blog, Mortgage Education, Mortgage Refinance

Fixed vs. Variable: Which Mortgage is the Better Choice?

Compared to fixed-rate mortgages, variable-rate options cost less for the borrower — even when rates are expected to rise

variable-vs-fixed-consider-the-numbers

By James Harrison
Mortgages.ca

 

When you’re thinking about what kind of mortgage you need, you might be tempted to do what many Canadians do without giving it much thought: They choose a fixed rate.

Fixed-rate mortgages are the most common type of home loan. According to a report by Mortgage Professionals Canada, 72 per cent of Canadians who bought homes in 2016 or 2017 secured fixed-rate mortgages.

Especially when news media stories predict interest rate hikes in the near future, borrowers grasp onto fixed-rate mortgages. They’re willing to pay a rate premium in exchange for a consistent monthly payment and a feeling of certainty.

 

But they’re not doing themselves any favours.

 

The media hype around possible interest rate hikes is often inaccurate, and the fear is fuelled by banks who profit from locking borrowers in at the premium rates attached to fixed-rate mortgages. These loans are simply more profitable than variable-rate mortgages, so banks like to create the impression that a five-year fixed mortgage is the obvious choice.

The fact is, a variable-rate mortgage is almost always a better choice for borrowers who want to pay less for their loan. And that’s true even when rates are expected to go up.

 

Feeling the variable-rate jitters?

Many borrowers are feeling nervous now because the Bank of Canada has hiked the key interest rate five times since July 2017, from .50 to 1.75 per cent, and economists have predicted more raises in 2019.

Those nerves are understandable. But when you do the math, and when you know the history of how interest rates move in Canada, it becomes clear that a variable-rate mortgage can still save you thousands in interest payments compared to a comparable fixed-rate product.

Not only that, it’s possible to reduce the risk and maximize the benefit of a variable-rate mortgage by making strategic monthly payments that are a little higher than they need to be from day one.

But more on that smart strategy in a minute. First, let’s look at the reasons why variable mortgages are a better choice.

 

Why variable-rate mortgages cost less

Variable rates are typically lower than fixed rates. But the spread between the two types of mortgages can vary.

That’s because variable mortgage rates are tied to the prime rate. When the Bank of Canada’s prime rate goes up, variable mortgage rates follow. On the other hand, fixed mortgage rates are primarily influenced by the yield on government bonds of the same term. The two types of mortgage are influenced by different factors, so the spread fluctuates.

When rates for five-year fixed mortgages are at least 0.5 per cent higher than rates for comparable five-year variable mortgages, it makes more mathematical sense to choose a variable product.

The spread is important because when it’s 0.5 per cent or more, it’s extremely unlikely that rates will go up enough during the five-year term of a mortgage to make a variable mortgage more expensive than a fixed one.

We know it’s unlikely because we can look at how the Bank of Canada’s has historically adjusted its prime rate, which in turn causes variable mortgage rates to go up or down.

When the Bank of Canada implements federal monetary policy by adjusting the prime rate, it rarely does so quickly. It moves the rate up or down by 0.25 per cent with each adjustment, then it waits to see the effect on inflation.

As well, given historical trends, it’s extremely unlikely that rates will only go upward over the five-year term of a mortgage. They may go up for a while, but then they’ll go down again because of the cyclical nature of the economy.

 

We can apply our understanding of history and make some reasonable predictions about the future. Looking forward at the next five years, we see that while rates may go up a few times over the next two or three years, an economic recession is due in 2020 or 2021. Rate decreases are the federal bank’s likely response.

With the current spread between five-year fixed and five-year variable rates, the prime rate would have to go up by 0.25 per cent about seven or eight times over the next five years for you to start losing more with a variable-rate mortgage than you would with a fixed-rate mortgage. It would have to stay up, too, with no rate drops in between.

But that scenario is beyond imaginable for most people in the financial industry. If the prime rate were to go up — and only up — seven or eight times in less than five years, we’d be experiencing a widespread economic meltdown the likes of which we’ve never seen. It’s extremely unlikely.

 

The exception to the ‘variable is better’ rule

When we look at historical data, we can see the spread between fixed and variable mortgages is almost always greater than 0.5 per cent in Canada. Over the past decade, the spread has usually stayed between about 0.7 and 1 per cent.

There was a short period in 2016 when rates for fixed mortgages were low and the spread between fixed and variable was a mere 0.3 per cent. During that period, there was a strong reason to choose a fixed mortgage. But it’s extremely unlikely that we’ll see rates and spreads like that again anytime soon.

 

Why variable rate mortgages are more flexible

In addition to offering lower costs, variable rate mortgages allow borrowers more control and flexibility than a fixed mortgage.

In a variable mortgage, the borrower can break the mortgage at any time with only a three-month interest penalty. Compare that to fixed rate penalties, which are equal to either three-months interest or the IRD, or interest-rate differential calculation, whichever is higher.

For example, on a $500,000 variable-rate mortgage, the penalty for breaking it would be about $3,000 compared to a $20,0000 penalty on a comparable fixed-rate mortgage with a big bank.

No one plans to break a mortgage, but life happens. And avoiding a $20,000 penalty can make a dramatic difference in your life when you’re going through unexpected life changes.

In addition, a variable-rate mortgage allows you to lock into a fixed rate at any point. But it doesn’t work the other way. A fixed-rate mortgage cannot be changed to a variable one during the length of the term. You’re stuck with a fixed rate for the entire five years, no matter which way rates go.

How to reduce the risk of a variable mortgage

We suggest our clients choose a variable mortgage, but that they make monthly payments as if they had chosen a fixed one with a higher rate of interest.

That means they structure their household budgets in order to pay more than the minimum payment with each monthly payment. An extra $200 or $300 per month goes toward paying off principal instead of interest before rates have had time to increase. So the borrower saves thousands in interest over the life of the loan. And they pay down thousands more of the principal while they wait for any potential rate increase.

The strategy also builds in a buffer of three or four potential rate increases. Even if the prime rate goes up steadily for a year or two, the borrower is already used to a higher payment and their household budget is not affected by the rate changes.

In the 11 years I’ve been in the mortgage business, I’ve never once had a client regret going variable, but I’ve had many regret going fixed.

What to do if rates start to rise

The option to go fixed always exists for borrowers in variable mortgages. And when the news is full of predictions that interest rates are going up, clients sometimes call to ask about locking in to a fixed rate.

We never advise our clients to take the option of going fixed.

Instead, we suggest they increase their payments as if they did lock in. Or we suggest they break the current variable-rate mortgage and set up a new one with an even better variable discount.

What to look for in a fixed mortgage

As a licensed mortgage broker, I consider it my responsibility to explain the pros and cons of fixed-rate and variable-rate products. And I keep an eye on the spread, so I know I’m always giving up to date advice on which option makes more mathematical sense. But some borrowers will choose a fixed mortgage every time, no matter what the math indicates.

In that case, and also when the spread does drop below the 0.5 per cent mark, it’s important to choose the best possible terms for a fixed-rate mortgage, paying close attention to prepayment penalties.

While most borrowers have no intention of breaking their mortgage, about 60 per cent of Canadians do. So if you’re going fixed, you must look carefully at the penalties you’ll incur if you end up having to break it.

We recommend our clients choose non-bank lenders (also known as monoline lenders) when they do choose a fixed-rate mortgage. These dedicated mortgage lenders calculate IRD penalties differently than banks do. While banks use the posted rate to calculate the IRD, monoline lenders use a rate that’s an average of about 1.5 per cent lower. That means a significantly lower penalty when your loan is with a monoline lender.

 

How a mortgage broker helps

As a licensed mortgage broker, I help my clients get the mortgage that’s right for them by negotiating on their behalf with banks, credit unions, and other mortgage providers for the best rates and products. The cost of my services are free to home buyers. My fees are paid by lenders.

 

Interested in refinancing to reduce your mortgage costs? Call me to set up a free consultation.

blog, Mortgage Education

What Is Your Home Worth?

Everything You Need To Know About Home Appraisals

what-is-your-home-worth

By Scott Nazareth
Mortgages.ca

 

Getting an appraisal is a key part of the process of getting a mortgage. It’s one you should understand when you make an offer on a home, as the appraisal process can move quickly after you make a winning bid.

What is an appraisal?

Appraisals assess the current market value of a property.

Mortgage lenders sometimes require a formal appraisal to determine a home’s value for mortgage purposes — regardless of the price that has been paid for the property. They want to be sure a house is actually worth what they’re lending its purchaser.

This part of the buying process happens after your offer to purchase has been accepted, and before the mortgage has been finalized.

 

Who conducts an appraisal?

A licensed appraiser will determine the value of the home.

In Canada, there are two bodies that license and educate appraisers. They are the Canadian National Association of Real Estate Appraisers and the Appraisal Institute of Canada. Members of both associations are recognized by banks, credit unions, mortgage lenders, and mortgage insurers.

Lenders require that appraisals are done by companies on an approved list. A licensed mortgage broker ideally has knowledge of specific appraisers on the lender’s approved list and will be sure to choose one that is local, which ensures they’re up-to-date on neighbourhood factors that may affect a home’s value.

 

Who pays for an appraisal?

Usually, the purchaser pays the $300-$500 cost of an appraisal.

 

What is included in an appraisal?

1. Value

An appraiser will study the exterior and interior of your property, as well as the land surrounding it. They will also consider the value of secondary structures located on the land.

There are three main ways to calculate the value of a property: the direct comparison approach, the cost approach, and the income approach.

 

The direct comparison approach looks at comparable properties that have been sold in the recent past. Making adjustments by looking at the details of each property, the appraiser assigns a value that the property would reasonably earn on the open market.

The cost approach is a less common way of determining value for residential homes. It’s used when relevant comparable sales data does not exist. This method takes into account the value of the land, plus how much it would cost now to construct a similar home.

The income approach is used for multi-unit properties, where the income related to the property is a key determinant of its value.

 

It doesn’t matter which method your appraiser uses. What matters is the final number, because that affects how much a lender will agree to give you.

 

2. Rental income

When you purchase a rental property, you’ll have to declare what rent you’re going to charge. That can be substantiated by providing a rental agreement with someone who already lives there, or someone who will live there when you move in.

If there’s no rental agreement in place at the time of your purchase, an appraisal will calculate the rental potential by looking at similar properties in the immediate vicinity.

 

3. Photos

An appraisal will include photos of both the exterior and interior of a home, including the attic, piping, and insulation. However, it’s important to note that an appraisal is not the same as a home inspection. They may report on similar things, but an appraisal should never replace an inspection.

appraisals-do-not-replace-home-inspections

When is an appraisal required?

An appraisal is typically not needed when borrowers put less than 20 per cent down because the lender can take comfort from the fact that the loan is covered by insurance. But in some cases — when the value or the condition of a property is in question — the insurer can request an appraisal.

Most borrowers who put more than 20 per cent down are not covered by mortgage insurance, so an appraisal is required. When the property is not insured, there is no guaranteed value in it and the lender needs some other form of assurance that the loan will be repaid. An appraisal is part of that.

But there are two ways to avoid an appraisal.

One way is to use the automated valuation model. There must be enough relevant data for this model, which looks at a database of comparable sales and determine if your property’s price is within an acceptable range.

The other way is when the loan is a small percentage of the total purchase price. If you’ve put 50 per cent down, your lender may waive the right of appraisal.

 

What happens if something goes wrong with an appraisal?

Certain factors in a property’s construction can reduce the appraiser’s calculation of its value. For example, vermiculite insulation, Kitec plumbing, UFFI insulation, and knob-and-tube wiring can all bring your appraised value down.  This can make the property un-financeable for some lenders or may require it to be dealt with prior to closing or with purchase-plus or a hold back.

If an appraisal value is less than the purchase price, the purchaser must make up the difference.

For example, if you paid $749,000 for a home but an appraiser values it at $729,000, the bank will approve a loan based on the lower number. So you’ll have to come up with an extra $20,000 to make up the difference. If you can’t, you may no longer qualify to purchase the property.

Such a situation can be challenging on the short timeline of a home purchase, so it’s a good idea to have a contingency plan. It’s possible that you’ll learn that your home has a problem in the appraisal stage, and it’s never fun to be surprised at that point.

If you’re currently having challenges with an appraisal, contact us to find out how we can help.

Is it worth it to get a second opinion?

Yes. If you’re in doubt, it’s worth the peace of mind that comes with knowing your property was fairly and accurately assessed.

That’s especially true if your first appraisal comes in lower than expected. After a second opinion, the bank may choose one or the other of the reports, or they may take an average of the two. Either way, it’s worth knowing that your property was fairly assessed.

Does an appraisal affect my taxes?

No. It’s not the same as a tax assessment, and your home’s appraisal is not shared with tax assessors.

 

Do you have questions about appraisals or the mortgage process? Book a call to discuss how we can help with your mortgage needs.

blog, Mortgage Education

Don’t Sign That Renewal Letter!

When your mortgage term is nearly up, your lender will offer an easy renewal, but don’t be fooled into signing it

do-not-sign-that-renewal-letter

By James Harrison
Mortgages.ca

 

If your mortgage is up for renewal anytime soon, you can expect to receive a letter from your lender giving you the option to simply sign it and send it back for an easy renewal of your mortgage.

It may look innocuous. But it’s not. Whatever you do, don’t sign it.

The rate your lender is offering in that letter is probably half a per cent — or more — higher than the going rate. Depending on the size of your mortgage, that could cost you tens of thousands of dollars in additional interests charges, not to mention paying off thousands less in principal.

 

Consider your options with a broker

Don’t just sign the renewal letter and send it back. Instead, spend time making an informed decision about the biggest investment of your life.

The first step in your decision-making process is to reach out to a reputable broker. At Mortgages.ca, we help our clients consider their options by asking a few basic questions:

  • Who is your current lender?
  • How much is outstanding on your mortgage?
  • When is the renewal maturity date?
  • What are your financial goals in the next one to five years?

 

During a 10 to 20 minute call, with a bit of questioning, my clients eventually bring up something they hadn’t considered as a significant factor in their mortgage planning. They’re surprised to learn I can help them achieve their financial goals by managing their mortgage.

Most people don’t spend time thinking about the big picture and don’t have a knowledgeable sounding board for the discussion. I consider that a very important part of my role as a licensed broker. I ask questions to learn about their problems, then come up with solutions that will help them meet — and sometimes exceed — their financial goals.

 

Doing the work is worth it

Sometimes people think changing lenders is time-consuming, so they don’t question the renewal letter. They simply accept the bank’s terms without question. But exploring other options is well worth it. Would you trade 45 minutes for a few thousand dollars?

Whatever your informed choice turns out to be with your renewal, the process doesn’t have to be complicated. We can communicate by phone and email. In-person meetings aren’t needed — though they’re always possible.

 

Make an informed decision

When your mortgage term is over, you have three options:

  • negotiate with your lender for a better rate than the renewal letter offers
  • transfer your mortgage to a new lender to get a better rate and/or different terms
  • refinance to get equity out, or to reduce payments by changing the amortization period

 

Timing is important

I advise my clients to make sure their new mortgage is set up approximately three to six months prior to the renewal date.

It’s important to reach out as soon as you get a renewal letter. If you leave your research and decision-making to the last minute, your lender may automatically renew you into an undesirable mortgage — and possibly at a very high rate.

 

Is your mortgage coming up for renewal soon? Contact us about how I can help you make the right choice.

 

 

blog, Mortgage Education

Non-Resident Buyers: What You Need to Know About Buying Property in Canada

The rules for borrowing to buy property in Canada are a bit different for non-residents

Toronto Waterfront

Toronto is among the top places for non-residents to purchase property in Canada. Photo credit: Scott Webb via Unsplash

 

Who can buy real estate in Canada?

Canada welcomes buyers from anywhere in the world, and there are no restrictions to the types of properties people can buy.


What is a non-resident?

It has nothing to do with citizenship.
Lenders define a non-resident as someone who does not earn an income here and who does not file taxes in Canada.


How much does a non-resident need for a down payment?

Lenders typically ask for a larger down payments from non-residents of Canada than they do from resident borrowers. Exactly how much more depends on a few factors. For example:

U.S. Residents

If you’re living in the United States,  plan to use the property rather than rent it, and can provide proof of income and down payment, your down payment must be at least 20 per cent of the total purchase price.

Elsewhere in the world

If you’re living anywhere other than Canada or U.S. and can provide proof of income and down payment, your down payment must be at least 35 per cent of the purchase price. As well, your down payment cannot be a gift from another person or entity.

 

If you don’t have proof of income, you can still get a mortgage, but you’ll need a down payment of at least 50 per cent. A maximum mortgage of $750,000 is available to borrowers in this program, with a maximum amortization period of 25 years. (Note that If you already own property in Canada, you won’t qualify for this special program and will have to provide proof of income and a down payment of at least 35 per cent.)

The Bond

Many non-residents buy condos in Canada’s urban centres. Above, The Bond Condos in Queen West, Toronto. (Photo credit: Condos.ca)

What documents do non-residents need to qualify for a mortgage in Canada?

Unless you can put 50 per cent down, which exempts you from needing to provide proof of income, you’ll need:

  • Proof of income (letter of employment, pay stubs and income tax returns)
  • Proof of down payment (bank statements for the last 90 days)
  • Reference letter from a bank outside Canada
  • Report from an international credit bureau or bank statements for the last six months

 

Will lenders consider rental income as part of a non-resident’s income?

Lenders will not allow applicants to include rental income as part of their income to qualify.


What kind of mortgage rates and terms do non-residents get?

For the most part, provided they meet the mortgage eligibility criteria, non-residents can access the same mortgage products that are available to residents of Canada.

But there are a few restrictions:

  • Some lenders may charge a rate premium for non-residents
  • Non-residents cannot have amortization terms of more than 25 years
  • Non-residents cannot get home equity lines of credit
  • Non-residents cannot refinance


Do non-residents need to be in Canada at any point to secure financing for a home?

Usually, non-residents will need to be in Canada at least twice to complete the process of financing and buying property.

First, a buyer will need to visit Canada to open a Canadian bank account. (Note, there are exceptions to this rule. For example, some of our clients have found that, as HSBC Premier clients, they’ve been able to open accounts in Canada from their home countries.

Second, non-residents must be present at closing, as there are no power of attorney options for closing.

What taxes do non-residents pay when purchasing real estate in Canada?

Non-residents are subject to the same land transfer taxes as Canadian residents when they purchase property here. Those buying residential property in or near Toronto will be required to pay Ontario’s Non-Resident Speculation Tax, which is 15 per cent of the purchase price.

Want to learn more?

Buying a home from another country can seem like an overwhelming prospect because there’s so much to learn. But we’re happy to explain the details. As licensed mortgage brokers, we work with home buyers and a wide array of major lenders to match people with the perfect mortgage for their needs. Our services are free to the home buyer.

 

Ready to dig deeper?
Go to our online application form so we can assess your specific mortgage needs.

blog, Mortgage Education

Top 5 Reasons to Work With a Mortgage Broker

Purchasing or refinancing your home can feel pretty daunting – but it doesn’t have to be when you have the right resources.

Steve Harrison, mortgage broker with Mortgages.ca breaks down the top 5 reasons why working with a mortgage broker can save your time AND your wallet!

 

blog, Mortgage Education

Mortgages 101: Everything a First-Time Home Buyer Needs to Know

Our job is to explain the language, the process, the players and the pitfalls, so it all goes smoothly and you become a homeowner with a minimum of stress

First-Time-Home-Buyers

By Scott Nazareth

 

Getting a mortgage is no walk in the park for first-time home buyers.

For starters, there’s a lot of new vocabulary to learn, and sometimes the terminology can be confusing.

Second, it’s a decentralized process, with many different players and many moving parts.

Further, some of the steps in securing home financing are time-sensitive. It’s a challenge staying calm when you’re depending on multiple people to do their part on time.

Simplification is possible

I believe the process can be simplified. And as a registered mortgage broker, I consider that to be part of my job, especially for people who haven’t been through the process before.

My approach to working with first-time home buyers is to get to know their needs up front, and then help them understand their choices by providing just the right information at the right time.

First things first

Before our first meeting, I let my clients know exactly what documents they will need to present in order to fill out an application:

  • Proof of income: an employment verification letter and a current paystub are usually enough, but some lenders ask for T4s
  • Identification: Two pieces of identification such as a driver’s licence, a social insurance card, a passport or a credit card
  • Financial statements: If you are self-employed, you’ll need to provide the last two years of business financials

A single credit report

At this point, I also ask for a client’s consent to pull a credit report.

When purchasers work with a mortgage broker, the report is valid regardless of how many lenders or products we explore.

That’s one benefit of working with a broker. When individuals shop around for themselves, each institution they apply to will request a credit report, but many inquiries in a short period of time can negatively affect the borrower’s credit score.

Types of lenders

When meeting with new clients, I start by explaining exactly what lenders I work with.

Here’s how working with a broker differs from working with a mortgage specialist at a bank. We work with a variety of different financial institutions:

  • Banks
  • Credit unions
  • Insurance companies
  • Monoline lenders

 

After that, we talk about the basic terminology of mortgages.

Fixed vs. variable

Fixed mortgages lock an interest rate for a set period of time, so a borrower knows exactly how much their payments will be, no matter what happens to interest rates.

Fixed mortgages have significantly larger prepayment penalties than variable mortgages.

Variable mortgages allow your rate to fluctuate, so there is a risk your rate could increase over a five year period. Variable mortgages typically offer lower rates than fixed mortgages.

Short term vs. long term

The term is the length of the commitment lenders and borrowers make to a certain agreement.

Fixed rate mortgages can have terms between one and 10 years, and variable rate mortgages can have either three or five year terms. At the end of the term, a borrower negotiates new terms, and the new terms will reflect current interest rates.

When rates are expected to drop, borrowers benefit from choosing a shorter term so that when they renew, they’ll be paying a lower rate.

When rates are expected to rise, clients usually choose a longer term to lock in at the current rate.

Open vs. closed

Almost all mortgages are closed. Many people are under the assumption that an open mortgage is an option available to them, but it’s a bit of a myth. In most cases, open mortgages are not available.

 

Determining affordability

By referring to the documents my clients provided up front, and by discussing their risk tolerance and financial goals, we determine how much they can afford to borrow.

Considering options

After the basics have been established, we begin to narrow down the options to find a mortgage that works for each client’s unique lifestyle and financial goals.

I offer my detailed knowledge of each option, helping them understand the most important factors to consider in their choice.

Applying for pre-approval

Once we’ve chosen a lender, we submit an application to a corresponding lender.

Typically, we wait about 24 hours for an approval. When it arrives, we go over the conditions of the approval on the phone, to make sure they’re what we expected.

If it’s what we expected, we set up our clients with the opportunity to sign with an e-signature, so they can sign their documents from home, rather than having to travel to our offices.

Inevitably, there are questions. And that’s okay. First time home buyers usually have a lot of questions, and, as a registered broker, I’m prepared to answer them. It’s just part of the process.

My goal is to make the process of buying a home as smooth as possible for first-time home buyers. Here’s how I do it:

Getting organized

Some people have the perception that getting a mortgage is a difficult process. It is an organizational challenge, but I simplify the process for my clients by providing checklists for all the things that need to get done on the way to making a home purchase.

Accessing the right information at the right time

I try not to overwhelm clients with masses of information, but rather, provide the necessary facts and nothing more, at exactly the right time in the process.

For example, I always let first-time buyers know they can email me MLS listings as they’re looking for a home. I provide sample mortgage payments for each listing, so they have a good idea of how much their monthly payments will be for the different price points.

I take into account how payments can vary according to maintenance fees and property taxes, so that you understand the payments involved with each property you’re looking at.

And of course, because I know fast action is sometimes required, my replies are always timely.

Staying steady

As my clients get closer to making a purchase, my job is to help them stay calm through the emotional moments that inevitably arise.

My experience means I can help clients take rational action even when they’re on the emotional roller coaster of falling in love with a potential home and then facing obstacles along the way to purchasing it.

Solving problems

If there are obstacles, we face them head on, and sometimes even with humour. I believe it’s possible to make the process of buying a first home both enjoyable and efficient.

I love it when clients tell me they thought getting mortgage was going to be more difficult than it turned out to be.

When they don’t have to sweat the details of their mortgage, they can focus more on the fun parts of buying a house, like shopping for furniture or throwing a house party.

That’s what I aim for.

To make it just a little easier for first-time clients to understand the process of borrowing to buy a home, I’ve prepared a FAQ document that breaks it all down:

 FAQs Answered

FAQ

What documents do I need to apply for a mortgage?

You’ll need to provide:

  • Proof of income: an employment verification letter and a current paystub are usually enough, but some lenders ask for T4s
  • Identification: Two pieces of identification such as a driver’s licence, a social insurance card, a passport or a credit card
  • Financial statements: If you are self-employed, you’ll need to provide the last two years of business financials
  • Consent for your mortgage broker to request a credit report

 

What’s a downpayment?

A downpayment is an amount of money a purchaser gives to a home’s seller. It represents a portion of the total purchase price. The rest is paid by the purchaser’s mortgage.

 

How much downpayment will I need?

In Canada, the minimum downpayment required is determined by the price of the home.

For homes priced at less than $500,000, the minimum downpayment is five per cent.

For homes priced between $500,000 and $1 million, the minimum downpayment is five per cent of the first $500,000 and 10 per cent for the rest.

For homes priced at more than $1 million, 20 per cent of the purchase price is required.

 

What’s a pre-approval?

If you plan to buy a home soon, a pre-approval can help smooth the process. A letter from a lender specifies the type and amount of loan you qualify for. This smooths the process because you’ll know the price range you can afford, and you’ll be seen as a serious buyer by sellers and their agents.

 

What are terms?

Terms are the amount of time that the rate, lender and legal terms of your mortgage are in effect. Terms vary from x to y years and should not be confused with the amortization period of a mortgage.


What’s amortization?

An amortization period of a mortgage is the amount of time it will take a borrower to pay back the full amount of a loan. Most mortgages in Canada have an amortization period of between 25 and 30 years and and should not be confused with the terms of a mortgage.

A term is a shorter-term agreement made between a borrower and a lender, usually for between one and 10 years. At the end of the term, the borrower negotiates new terms at current interest rates.

 

What are prepayment penalties?

Prepayment penalties are fees charged by the bank if you break your mortgage or pay your mortgage down early. The amount can vary, depending on how much you owe, how much you want to prepay, how much time is left until the end of your term, and the method your lender uses to calculate prepayment penalties. Be sure to understand the fine print of penalties because the fees can be significant.

 

What are e-signatures?

We allow clients to use electronic signing services. Clients can tap and sign documents without the hassle of printing and scanning.

Coupled with that, we work with Nexera Law, an innovative real estate law firm in Ontario. A Nexera notary will visit a home buyer’s house for the closing process, and Nexera offers services in the evenings and on weekends, making it more convenient for the purchaser.

 

What special programs are first-time buyers eligible for?

First time home buyers are eligible for certain programs that can reduce the total purchase price.

  • Land Transfer Tax Rebates

At closing, your lawyer will inform you of the provincial and municipal land transfer tax rebates you may qualify for. You can use our residential land transfer calculator to estimate how much those rebates will add up to on your purchase.

  • RRSP Home Buyers’ Plan

The Home Buyers’ Plan (HBP) allows buyers to withdraw up to $25,000 from an RRSP to buy or build a home. Couples can withdraw up to $50,000 and the best part is that you are not taxed on the withdrawal as you normally would be. However, you must repay this money into your RRSP within 15 years. To qualify, neither you nor your spouse can have occupied a home as your principal residence in the past four years.

  • First-Time Home Buyer Tax Credit

Since 2009, first-time home buyers may be eligible to receive the First-Time Home Buyer Tax Credit (HBTC), a non-refundable personal tax credit based on $5,000 for first time home buyers. It’s calculated by multiplying the lowest personal income tax rate for the year by $5,000. For example, if it was 15 per cent, the credit will be $750.

  • New to Canada program

Genworth’s New to Canada program is for people who have immigrated within the last five years. They may not have established much credit, so alternative sources are used to determine worthiness, which may include, for example, a letter from a landlord confirming timely rent payments for a period of 12 months, or a 12-month payment history of a utility bill.

 

How will I know whether I can afford the monthly payments on a particular home?

We provide immediate feedback for buyers on the hunt for a home. Feel free to email MLS listings to us. We’ll provide sample mortgage payments for each listing, so you’ll have a good idea of how much your monthly payments will be. Keep in mind that even among properties that have a similar list price, payments can vary depending on maintenance fees and property taxes. We take all of that into account.

 

When I pick a mortgage, how do I know I’m getting the best rate possible?

Of course, getting the lowest rate possible is important. But there are other factors to consider when choosing a mortgage product that’s right for you.

For example, purchasers should consider factors such as the length of the term, whether a rate is fixed or variable, the level of risk they can tolerate, whether they intend to make prepayments, and what kind of institution they want to work with.

We factor in these many aspects of what our clients feel is important, and we get them the most competitive rate to meet their goals.

 

How will I manage the transaction? It’s so confusing!

We’ll provide the information and guidance you need, when you need it. Our job is to help you make sure everything gets done right — and on time.

 

What’s a conditional offer?

An offer can include conditions that allow the purchaser to back out of an agreement if their conditions are not met. Main conditions include: finance conditions, status conditions, and home inspection conditions. The period of time is typically five days. Once the stipulated conditions have been met, the buyer cannot back out of the deal because of that issue.

 

What’s a finance condition?

When making an offer, a finance condition allows you to back out of the purchase transaction if you are unable to arrange a mortgage to your liking.

We always recommend finance conditions when an offer is made.

 

What’s a status condition?

A status condition allows you the ability to back out of a purchase transaction based on you or your lawyer reviewing a status certificate from a condominium corporation.

This certificate outlines the financial accounts — how they’re managing condo fees and maintenance fees, if there are pending lawsuits, defects in the building, or special assessments.

We always recommend status conditions when an offer is made.

 

What’s a deposit?

When you buy a property and the seller accepts the price you’ve made as your bid, a deposit is due immediately.

It doesn’t have to be your whole downpayment. It’s usually between two per cent and five per cent of the purchase price.

That amount is provided in trust to your agent to the listing brokerage to be held in trust until the transaction closes.

 

Got more questions? Let’s talk.

blog, Mortgage Education, Mortgage Refinance

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!

 

blog

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.