Mortgages.ca

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Alternative Lending: Intro to B-Lending

 

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%).

 

Ratios

 

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

 

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, 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…

 

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.

 

Summary

 

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 🙂

 

 

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Everything You Need To Know About Private Lending

I am sure that if you have watched CP24 by now, you have seen Oliver the Jeweller or another pawn shop offering private mortgages that close within 24 hours and that will fund any mortgage there is. Unfortunately, most people only learn about private lending when they are in a scenario that requires it. I am here to shed some light on the shadow world of private lending; to show you that private lending is a useful financing option for short term mortgages, unique situations and in emergency situations. As a disclaimer, not all brokers and private lenders are made equal. It is important to work with the professionals at Mortgages.ca, as we are high integrity and customer-focused brokers that are not in this business for a quick buck. 

 

Some of you may have heard about private lending in the news after the stress test came into effect in 2016/2017 as a shadow-subset of the mortgage industry that skirts the rules of the government and offers high interest risky mortgages to people who dare to apply with these unscrupulous figures. That description sounds more like an episode of the Sopranos than a true depiction of what private lending is and how private individuals fit into the lending landscape in Canada.

 

What is Private Lending?

 

Private mortgage lending is facilitated by a mortgage professional and a private individual or group of private investors. A group of private investors that choose to deploy their capital in mortgages often join a Mortgage Investment Corporation or MIC. These organizations originate mortgages and diversify risk by deploying investments into a variety of different mortgages. This is not to be confused with a syndicate mortgage, where a series of private individuals pool together funds for an individual transaction.

 

Why Choose Private Lending?

 

There are certain real estate transactions that do not work at A lenders or B Lenders. The type of risk involved in these transactions is often too great to fit within the business model of institutional lenders. For example, if an investor is purchasing a property in bad shape and looking to renovate the property to then sell it, often called a flip – poses a much greater risk to a lender than lets say a cookie cutter first time home buyer. These flips, often require a much shorter term prior to an exit, sometimes within 12 months or less. This short period of time creates a disadvantage to a lender offering sub-3% rates compared to a first time home buyer who will sign up for a 5 year fixed.

 

Another example includes certain types of deals/property types – for example, if a person wants to purchase raw land, these deals if at all, will only be financed at very low loan to values at banks/credit unions and sometimes they will turn them down all together. For unique deals, for example purchasing a co-op property or a hotel residence within a rental pool, a restricted resort style property – private lending may be the only option.

 

In emergency situations, sometimes in the process of a live deal – material changes can occur which will disqualify an applicant from their approved mortgage. If someone loses their job during the transaction, receives a pay-cut/reduced hours, the down-payment funds expected from a gift are no longer available, the sale of an existing property falls through and many more are reasons where out of the box scenarios that pose risk to lenders may fall in the hands of a private lender.

 

At Mortgages.ca we work our way down the conventional food chain of lenders to get our clients the least expensive option for their scenario. If we get a decline from an AAA lender we will try to get approved at a B lender or try to structure the file differently, with a co-applicant or guarantor etc. If we exhaust all other options or your financing requirements are too unique for conventional lenders we will be able to source you a private mortgage from a trusted partner.

 

Rates

 

Private mortgages have higher interest rates than other types of mortgages because of the risk each file poses to the individual or group of investors. Rates are typically determined based on the level of equity that exists in the transaction. The higher the level of downpayment, the lower the interest rate. We work with lenders that offer rates as low as 4.95% for mortgages at less than 50% LTV. These rates increase to up to 75%-80% on a first mortgage to 7.99% and more and second mortgages up to 85% at 12.99% (not including fees).

 

These rates are high, yes, but they are also typically set up as interest-only payments, which from a cash-flow perspective can really benefit you as the client. A 500k mortgage at 6.99% would cost approximately $2912/month versus a regular bank mortgage of 500k at 1.59% of $2020/month. Oftentimes people swallow the cost of this, as it’s typically set up as a very short term solution, where an exit strategy is discussed up front to lower costs over time.

 

Fees

 

Unlike conventional banks and B lenders, there is no direct compensation for your mortgage broker from a private lender. You will always be charged a fee from a broker arranging a private mortgage. These fees may vary based on loan size and complexity typically from 1-2% for loan sizes over 200k and higher to meet a minimum fee amount for loan sizes less than 200k. Private lenders also charge fees, these range from 1.5-3% typically and along with the broker fee are taken from the advance of the funds. Dealing with a professional, like the pros at Mortgages.ca will ensure you are treated fairly and equitably with a strategy that is transparent and that you are comfortable with.

 

Mortgage Hack: Do you have a private deal where you are being charged higher fees or rates listed above? Feel free to get a second opinion from the high integrity brokers at Mortgages.ca. We have saved clients thousands of dollars and protected consumers from predatory lending practises.

 

What to Look Out For?

 

Not all agents and lenders are made equal and there are some people out there who do not act with the same integrity as us at Mortgages.ca. Predatory lending practises occur when a private investor chooses to finance a property they wish to take-over from the client in the event of a default. Once a client starts missing mortgage payments, a private lender can start racking up fees/interest charges to capture the remaining equity and force a Power Of Sale or Judgement Proceeding.

 

Some brokers will also charge exorbitant fees in order to arrange financing because they know the client is in a bind and has nowhere else to turn to. The unique nature of the transaction and the direct relationship between the broker and the lender create the potential for taking advantage of unsuspecting clients. If you are in a situation where you would like to learn about your options, run it by the professionals at Mortgages.ca, we will provide you honest advice with no strings attached. Don’t believe me, take a look at what some of our customers have to say!

 

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Beyond the Headlines

Why the Fine Print Matters More Than the Interest Rates

The recent unveiling of a sub-one per cent interest rate on a mortgage got a lot of media attention.

 

When have interest rates ever been this low?

 

It’s no surprise people have been keen to jump on this offer but as tempting as it may seem, the devil is in the details.

 

Advertising such a low rate is a brilliant marketing move to get people in the doors of a bank — or at least on the phone during a pandemic. But if you don’t read the fine print before signing on, you may discover your low-interest mortgage wasn’t such a good deal after all.

 

What to look for in an ultra-low interest mortgage

 

Ask lots of questions and study the terms carefully with such mortgages. How long are you locked into this borrowing plan? What happens if your life changes drastically and you need to break your mortgage? What’s the penalty if that happens?

 

“Choosing a fixed rate is really dependent on your life not changing for some time, but no one can see into the future,” says Scott Nazareth, mortgage professional with Mortgages.ca. “For such a big investment, the penalties can be quite huge.”

 

And they’re generally written in the fine print of every deal. Those details need to be reviewed so you know what happens in case of career changes, which this year has taught us can happen suddenly, divorce or death. All of these circumstances can cause a major shift in income and force you to break your mortgage.

 

Help where you need it

 

Buying a home is exciting, and sometimes the thrill of calling a place one’s own can override the heavier conversations that need to happen before signing on any dotted line, no matter how low the interest rate.

 

That’s why Scott Nazareth recommends working with a mortgage professional you trust. Having someone to discuss worst-case scenarios in an honest and frank way is important when securing the mortgage that works best for you. Together, you might find it’s better to pay a slightly higher interest rate if such a mortgage gives you the flexibility you need when life changes, especially for the worse.

 

Alternatively, a home equity line of credit might be the best financing option. “It’s something that needs to be considered when taking on such debt,” Nazareth says. “If you have to change around your mortgage and sell, you could be paying tens of thousands of dollars (in penalties) when you could be paying an extra 50 cents a day now (in interest).

 

There are lots of ways people can structure their debt to meet their goals. You should focus on the rate of change not just the rate that’s given to fit the circumstances of today.”

 

 

 

 

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Leveraging The Equity in Your Home To Buy A Cottage Now


Buying A Cottage

Thinking of Buying a Cottage? Here’s How to Leverage The Equity in Your Home to Make That Happen

Cottages have always been a hot commodity, but even more so this year as vacation destinations are limited and time away from the city can provide a much needed mental break and escape for many families.

 

But how do you get your hands on one of your own? Buying a cottage is probably much more realistic than you realized. Here’s how:

 

Leveraging Equity in an Existing Property

One of the most common ways that buyers are able to come up with a down-payment to buy their cottage is by using the equity that already exists in their home. This can fund the down payment, or you can finance the entire cottage this way.

 

For example, in Toronto, you can refinance your home up to a maximum of 80% market value.

  • –  Your home is currently worth $1.2 million
  • –  Remaining mortgage: $600,000
  • –  You can refinance up to 80%, so up to a total of $960,000 mortgage
  • –  $960,000 – 600,000 existing mortgage ≈ $360,000 cash

You can take that $360,000 in cash to buy a new property or as a secured line of credit.

 

 

What are the Down Payment Requirements for a Cottage?

Owner-occupied second homes/cottages:

  • –  You can buy a cottage (second home) with as little as 5% down on the first $500,000 and then 10% thereafter to $999,999.
  • –  If the property is > $1 million, you’ll need a 20% down-payment.
  • –  The down-payment will depend on whether the property is 4 season cottage (Type A) or summer only (Type B) – see below for more detail about that:
    •   >  Type A cottages – minimum 5% down
    •   >  Type B cottages – minimum 10% down *some lenders may require more

 

 

Cottage Mortgage Qualifications change depending on the type of property.
What does this mean?

Type A Properties mean “All-Season Secondary Homes”:

  • –  Owner-occupied or occupied by an immediate family member
  • –  Single-family dwelling
  • –  Property particulars:
    •   >  Must be a readily marketable residential dwelling
    •   >  Must be winterized with seasonal access
    •   >  Must have an estimated remaining life of > 25 years

 

Type B Properties mean “Seasonal Cottages”:

  • –  Same property characteristics as Type A homes except:
    •   >  Seasonal access permitted (road not accessible in winter)
    •   >  The property does not need to be winterized

 

 

*Important Note: These are general guidelines only, for insured purchases less than $1 million. If the value of the property is over $ 1 million, lenders have their own separate requirements.

 

 

There are also some special financing considerations to keep in mind!

Most lenders will want to know upfront if there is safe drinking water or UV filters, to ensure that what comes out of your tap isn’t toxic. As a result, water potability tests may be required if the cottage is on the water. They may also do a risk assessment for flood in certain areas.

 

 

 

*Important Note: You should always have a financing condition in your offer on a cottage or second vacation home – usually for at least 10 business days. This allows for the appropriate water tests to be completed and for an appraisal to be scheduled (appraisals usually take longer to schedule in smaller communities).

 

 

 

The Biggest Takeaway?

Buying a cottage is probably more affordable than you think. Either way, the key to securing cottage living — and making that staycation a peaceful escape — is to speak to a mortgage broker first.

 

 

 

 

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The New Normal: Home Appraisals During COVID-19

Few things have remained unchanged during the novel coronavirus pandemic.

Home appraisals are no exception.

Home Appraisals During COVID-19

They’re as routine as the sun rising every morning.

But even home appraisals have had to adjust to the COVID-19 pandemic that stresses physical distancing for the sake of public health.

Just a few short months ago, appraisers would walk through a home to assess its value when someone applied for a mortgage on a new property or hoped to refinance their existing home.

Now, with flattening the curve being top of mind, appraisers are relying more than ever on technology to do their job.

What to expect when getting an appraisal.

“There’s a lot that can be done on computers,” says Scott Nazareth, mortgage professional with Mortgages.ca.

Appraisers are turning to MLS in search of comparable sales to help determine a home’s worth. Then they’re making adjustments. Does your home have a marble floor? That will be considered in an assessment if an appraiser could only find similar homes with hardwood and carpet online.

The marketability of a home is also factored into appraisals. Is it next to a railroad or cemetery? What are the trends in the neighbourhood?

Appraisers did this kind of virtual legwork previously but more emphasis is put on it now.

Extraordinary assumptions in extraordinary times.

For as much as an appraiser can glean online, there’s nothing like seeing a home in person.

Appraisers typically go into a home to look at any renovations and upgrades. These days, they’re looking through windows, noting this in assessments as an extraordinary assumption. 

Extraordinary assumptions were frowned upon by lenders previously, but that’s changing, Nazareth says.

“Before, it would be considered a drive-by appraisal and not normally accepted,” he says. “Now lenders have accepted this new form of appraisal and it’s called a modified appraisal.”

Securing financing with a modified appraisal.

A-lenders quickly adjusted to accept extraordinary assumptions, Nazareth notes.

But private and B-lenders, which might be the only option for some borrowers, realize they’re taking on extra risk by granting financing based on these modified appraisals. B-lenders that may have offered up to 85 percent of a mortgage’s value before the pandemic has scaled back to 70 or 75 percent, Nazareth explains.

“They’ve really had to change their underwriting criteria and have had to change the amount they lend,” he says. “It’s definitely impacting the ability of clients to take money out in the alternative and private space.”