31 Jan

Are you in a Variable Rate Mortgage? Me too.

General

Posted by: Kimberly Walker

Are you in a Variable Rate Mortgage? Me too.

If you’re in a fixed rate mortgage, this news does not impact you. Mind you ‘impact’ is too strong a word to use for the subtle shift that occurred Jan 17, 2018.

Short Version

The math is as follows:

A payment increase of ~$13.10 per $100,000.00 of mortgage balance. (unless you are with TD or a specific Credit Union, in which case payments are fixed and change only at your specific request)

i.e. – A mortgage balance of $400,000.00 will see a payment increase of ~$54.40 per month

Personally, we are staying variable, for a variety of reasons…

Long Version

Qualification for variable rate mortgages has been at 4.64% or higher for some time. This required a household income of greater than $70,000.00 for said $400,000.00 mortgage .

Can 99% of said households handle a payment increase of $54.40 per month? Yes.

Will 99% of households be frustrated with this added expense? Yes.

Ability and annoyance are not the same thing.

Have these households enjoyed monthly payments up to $216.80 lower than those that chose a fixed rate mortgage originally? Yes.

Are 99% still saving money over having locked into a long term fixed from day one? Yes.

Should I lock in?

A more important question is ‘why did we choose variable to start with’? And this may lead to a critical question ‘Is there any chance I will break my mortgage before renewal’?

The penalty to prepay a variable mortgage is ~0.50% of the mortgage balance.

The penalty to prepay a 5-year fixed mortgage can increase by ~900% to ~4.5% of the mortgage balance. A massive increase in risk.

There are many considerations before locking in, many of which your lender is unlikely to discuss with you. It’s to the lenders advantage to have you locked into a fixed rate, rarely is it to your own benefit.

At the moment decisions are being made primarily out of fear. Fear of $13.10 per month per $100,000.00

What about locking into a shorter term?

Not a bad idea, although this depends on two things:

Which lender you are with as policies vary.
2. How many years into the mortgage term you are.

If your net rate is now 2.95%, and have the option of a 2-year or 3-year fixed ~3.00% – this may be a better move than full 5-year commitment.

Do not forget the difference in prepayment penalties, this is significant.

Bottom line – Know your numbers, know your product, stay cool, and ask your Dominion Lending Centres Broker.

These are small and manageable increases.

P.S.

It was a bit disappointing to see logic and fairness fail to enter the picture, after the last two Federal cuts to Prime in 2015 of 0.25% each the public received cuts of only 0.15% each time.

Every single lender moved in unison, not one dropped the full 0.25%.

Amazingly, not a single lender saw fit to increase rates by the exact same 0.15% on the way back up. Every lender has instead increased by 0.25% – a full 100% of the increase passed on to you, the borrower.

Not cool man, not cool at all.

We share all the pain of increases, and get only part of the pleasure of decreases.

I am disappointed by this, not surprised, but disappointed.

31 Jan

For Rental Properties, Cash (Flow) is King

General

Posted by: Kimberly Walker

Ask pretty much anybody about mortgages and the first, sometimes only thing they want to talk about is the interest rate. In my business as a Mortgage Professional, my job is to educate clients that while interest rate is definitely a cornerstone of your mortgage decision, it is not the only factor to consider when agreeing to sign a mortgage commitment. In many cases, the lowest interest rate does not represent an ideal fit, especially when the actual mortgage isn’t aligned with customer’s stage of life, priorities, or long-term outlook. Rental properties are a prime example of mortgage situations where basing a decision solely on the rate is often short-sighted and in some cases detrimental to the long term viability of one’s investment.

Rental properties can be a lucrative way to diversify investments, build passive income and long term net worth. They can also be costly, rigid and very problematic if you don’t choose the right property, area, tenants and MORTGAGE PRODUCT. Like any investment you are going to do your research before buying – RIGHT? And you are going to take your time and screen potential tenants vs taking the first Kijiji reply from @fraudster.com offering a cash deposit higher than you have specified – RIGHT? I’ll leave that part up to you. Where I come in is ensuring that the mortgage product you are using allows you the most flexibility on your payments and overall investment. The best way to ensure that your rental investment does not become a sucking vampire on your personal bank account is to minimize the cash outlays you are obligated to make.

Enter the Home Equity Line of Credit (HELOC).
In my 10-plus years of doing mortgages and owning investment property, the HELOC is far and away my favourite product for investment properties.

First & foremost – CASH-FLOW. HELOC’s allow you the option of making interest-only payments monthly. The monthly payments on a standard $200K mortgage using current 5 yr fixed rate of 3.39% for example are $987. Interest only payments would be about $650. That’s a cash flow difference of $340. Think of a vacancy – they happen. That’s $340 of your own money that you don’t have to pull out of personal savings to cover while your investment income is stalled.

Having the ability to scale back or minimize your cash outlays can be the difference between good and bad when it comes to an extended vacancy, renovation or unforeseen expense such as a repair or insurance claim. This very feature has allowed me to take the time needed to properly screen potential tenants when I have a vacancy and not rush into leasing to the very first interested reply. I can tell you that one of the worst mistakes that can be made with a rental is to scramble to get tenants in so they can start paying rent only to find out you picked the wrong people.

HELOC’s also offer a number of additional features:

Fully open – imagine somebody comes along offering you top dollar for your investment property. A HELOC is fully open meaning it can be paid off immediately without restriction or early payout charges. You can accept the offer and cash out immediately without seeing profits eroded by penalty charges and fees. With a standard mortgage you may have a payout penalty ranging from 3 months interest into the tens of thousands depending on mortgage type & institution (cringe if you have a fixed mortgage with one of the Big 5 Canadian banks).

Revolving – so you’re an investment property wizard and the cash you are making has allowed you to pay down the HELOC we set-up dramatically. You can use the available space on your current HELOC towards the purchase of another property. Keep your personal savings and investments in tact and don’t have to ask permission to access the equity. That’s the beauty of revolving credit.

The main (only) drawback to a HELOC over a standard, amortizing mortgage is that the interest rate tends to be slightly higher (about .50%). To me this argument rings hollow. Since your rental property is essentially a business, the interest that you pay on a mortgage is eligible to be written off for tax purposes. Given the strict criteria involved in qualifying for mortgages these days, I’m willing to bet most people with rental properties are already showing income that has them in an elevated tax bracket. That means that every extra dollar of profit reported on tax returns gets annihilated by CRA. Sometimes increasing an individual’s interest expense actually helps them bring their reported profits on rentals close to breaking even and honestly that’s why we have accountants (SIDE NOTE: please use an accountant if you are going to play in the investment game).

Finding lenders who offer HELOCs on rentals isn’t easy, especially if you are wanting only 20% downpayment (80% LTV). Most lenders these days want more meat on the bone (equity) for rental properties. There are definitely good lenders out there doing rental HELOCs at 80% LTV. That’s where a call to your trusted Dominion Lending Centres Mortgage Professional and the proper strategy can pay off in spades.

29 Jan

8 Things You Can Do To Get The Best Renewal

General

Posted by: Kimberly Walker

With 47 per cent of homeowners scheduled to renew their mortgages this year, 2018 is a year of change for lots of Canadians.
Here are the top 8 things you can do to get the best renewal:

1. Pull out your mortgage renewal now, and start early. When you are proactive instead of reactive you can see if there is anything on your credit score or lifestyle that we can modify to ensure you are positioned for the best renewal. You are only in a position to do this when you start early- in the last year of your mortgage you will have the most amount of options available. For example, there can be an inaccuracy in your credit report or you may be considering an income/job change that would impact your options. We can look at timing accordingly for you.

2. Do not just sign the renewal offered. Lenders can change the terms of your mortgage, and the renewal you are signing can cost you up to four per cent of your equity if you are with the wrong lender for your current life stage.

3. Most people think the best rate is the best renewal – WRONG. The terms are most important and with all terms moving or selling is the only reason most people think they would ever break a mortgage- THIS is simply not the case, a change in the interest rate market, divorce, health, job change, investment opportunity and many other reasons would contribute to a future modification being beneficial for a consumer.

4. Take into consideration lender history. The lender can have a higher prime then anyone because they know the cost to leave outweighs staying the course. The lenders are very smart with their calculated risks- and this is not something they have an obligation to disclose.

5. Remember your lender has a bias – their job is to handcuff you so they can make as much profit off you as possible- don’t be a victim.

6. Do not shop each lender on your own, it takes points off of your credit score. All lenders have different rates based on your score and you want to position yourself to get the best. By using a mortgage professional, they can shop multiple lenders protecting your credit using only one application, while the rate variation can be on average a half a percent!

7. Don’t get sucked into the online rate shopping- any monkey can post a rate online and you can drive yourself crazy looking at something that does not exists. In today’s complex mortgage market there are significantly different rates based on – insured mortgage vs uninsured mortgage, switch vs refinance, purchase or renewal, principal residence vs rental, salary or self-employed, 600 credit score or 700 credit score, amortization of 20 years to 30 years, type of property condo vs house, and leased land or freehold. The variations can mean a difference in thousands of dollars. Like diagnosing a medical condition, you can’t go online, you do have to put in the appropriate application and supporting documents to verify which options are available to you that will result in the lowest cost in borrowing.

8. Remember your mortgage is the largest debt and investment most of us have, when you contact an independent mortgage professional, we are going to invest all the work and expertise and advise you in your best interest regardless if we get your business. We may after our review advise you to stick with your existing lender, or make another recommendation for you. We are only here to enhance your finances and save you money, and there is no cost for our service.

25 Jan

Mortgages with the 20 Per Cent

General

Posted by: Kimberly Walker

There have been a lot of discussions around the new mortgage rules and I have had a few clients ask about what that means for them. Since stress testing on mortgages began last year, the biggest change this January will be for people who are putting more than a 20% down payment on their new homes.

What do the new mortgage rules mean for them?
The impact of the new mortgage rules as of January 1, 2018, will require all uninsured mortgage borrowers to qualify for their mortgage using the Bank of Canada five-year benchmark rate, or at their current rate plus an addition 2%. (Uninsured mortgage borrowers are typically those who purchase a new home with more than 20% of its total value.)The government is stress testing our current finances as a way to help prevent any unnecessary financial risks from Canadians. This change was primarily intended to help curb the housing bubbles in Toronto and Vancouver, but will affect homebuyers across the country, including those looking to qualify for a mortgage in Edmonton.

Why are new mortgage rules being introduced?
The revisions have been put in place to help ensure that uninsured borrowers can cope with higher interest rates. In the past, when there was a change in the market (increased interest rates, low employment, reduction in house values, etc.), Canadians were finding it difficult to keep up with their mortgage payments. In the past year, we have seen an increase in interest rates which has caused some concern with the government. The overnight rate – the interest rate set as the Bank’s policy interest rate, which influences mortgage rates, sat at a historically low 0.5% earlier in 2017  – has been raised 75 basis points by the Bank of Canada since July. A third rate hike took place this month. Although an unexpected surprise for many, the hike in interest rates is essentially providing Canadians with an opportunity to act more financially responsible. This new regulation will help make it more difficult for Canadians who were borrowing against the value of their homes to make new financial investments, thereby reducing the country’s financial risk.

Despite the changes to the new mortgage rules, people will still be looking to buy new homes with mortgages, but will be shifting their outlook on what they need. In Edmonton, where housing price are still very affordable, the shift may not be as difficult as in other markets. In a recent interview with BuzzBuzzNews, real estate broker and TalkCondo operator, Roy Bhandari said, “The new rules won’t slow sales. Instead, buyers will look at more affordable options on the market.”

22 Jan

Mortgage Broker Value

General

Posted by: Kimberly Walker

Not surprisingly, borrowers often default to their own Banker. And why not? It’s an established and comfortable relationship. Perhaps it’s viewed as the path of least resistance. But is it the right lender for the borrower’s current specific needs? Perhaps not.

More sophisticated borrowers may be of a size or scale that they have their own internal resources in finance, quite capable of securing the required financing. They are likely only in the market infrequently however, and almost certainly not fully knowledgeable as to all of the financing sources available.

Aren’t all Lenders pretty much the same?
Borrower’s may think that all institutional lenders are pretty much the same. Offering comparable rates, and standardized borrowing terms. This is rarely the case. Lender’s often prefer one asset class over another. They may have a particular need for one type of loan. A specific length of loan term may be desirable, for funds matching purposes. Real Estate risk is a fact for real estate lenders. How they mitigate this risk differs however. It may be stress testing interest rates during the approval process. Sophisticated risk pricing models may be used, having regard to previous loss experiences. The lender may rely significantly on collateral value, or guarantees. The conditions precedent to funding will often differ from lender to lender.

A real world example
I had the pleasure last year in advising a client who had 3 sizable real estate assets, in 3 quite distinct asset classes. The borrower’s loan amount requirements were significant, however they were flexible on loan structure. Accordingly, I sought out competitive, but differing deal structures. My goal was to provide a competitive array of options. A number of “A” class lenders were approached, several/most of whom this particular borrower had no previous experience with. I shortened the list to 5 lenders, and received Term Sheets from each.

Each Offer was competitive on a stand alone basis, but they differed quite substantially, in the following ways:

  • Loans were either stand alone, or blanket loans, or some combination.
  • Length of terms offered, differed by asset class.
  • There was as much as a 75 bps rate difference, from highest to lowest Offer.
  • The amortization period depending upon asset class, ranged from 15 to 25 years.
  • Loan amounts on individual assets differed as much as 20%.
  • Third party reporting requirements differed between lenders.
  • There were a combination of fixed vs. floating rate loan structures.
  • Recourse was limited by some lenders, on select assets, or waived entirely, upon a higher rate structure.

Leverage Your Knowledge
These variances are striking, yet each of the 5 lenders were considering the precise same asset, at the same time, with common supporting information from which to base their analysis. How was the borrower to know which Offer to exercise? As a Broker, I can add value by helping the borrower to consider both their immediate and longer term strategic requirements, in the context of their overall real estate portfolio needs. This was precisely how this borrower landed on the most appropriate Offer for their particular circumstances. In this particular case we presented different, yet competitive, and uniquely structured options for the borrower’s consideration.

Consider a Dominion Lending Centres Mortgage Broker when next in the market for financing. Leveraging a Broker’s knowledge is a tremendous value proposition.

19 Jan

How mortgage brokers help you get approved by ‘A’ lenders

General

Posted by: Kimberly Walker

Every year Canadian families are caught in unexpected bad circumstances only to find out that in most cases the banks and the credit unions are there to lend you money in the good times, not so much during the bad times.

This is where thousands of families have benefited over the years from the services of a skilled mortgage broker that has access, as I do, to dozens of different lending solutions including trust companies and private lending corporations. These short-term solutions can help a family bridge the gap through business challenges, employment challenges, health challenges, etc.

The key to taking on these sorts of mortgages is always in having a clear exit strategy, which in some cases may be as simple as a sale deferred to the spring market. Most times, the exit strategy involves cleaning up credit challenges, getting consistent income back in place and moving the mortgage debt back to a mainstream lender. Or as we would say in the business an ‘A-lender’.

The challenge for our clients over the last few years has been the constant tinkering with lending.

Guidelines by the federal government and the changes of Jan. 1, 2018 represent far more than just ‘tinkering’.

This next set of changes are significant, and will effectively move the goal posts well out of reach for many clients currently in ‘B’ or private mortgages. Clients who have made strides in improving their credit or increasing their income will find that the new standards taking effect will put that A-lender mortgage just a little bit out of reach as of the New Year.

There is concern that the new rules will create far more problems than they solve, especially when it seems quite clear to all involved that there are no current problems with mortgage repayment to be solved.

Yet these changes are coming our way fast.

Are you expecting to make a move to the A-Side in 2018?

It just might be worth your time to pick up the phone and give your Dominion Lending Centres Mortgage Specialist a call today.

I’m here and I’m ready to help.

18 Jan

9 Reasons Why People Break Their Mortgages

General

Posted by: Kimberly Walker

Did you know that 60 per cent of people break their mortgage before their mortgage term matures?

Most homeowners are blissfully unaware that when you break your mortgage with your lender, you will incur penalties and those penalties can be painfully expensive.

Many homeowners are so focused on the rate that they are ignorant about the terms of their mortgage.

Is it sensible to save $15/month on a lower interest rate only to find out that, two years down the road you need to break your mortgage and that “safe” 5-year fixed rate could cost you over $20,000 in penalties?

There are a variety of different mortgage choices available. Knowing my 9 reasons for a possible break in your mortgage might help you avoid them (and those troublesome penalties)!

9 reasons why people break their mortgages:

1. Sale and purchase of a home
• If you are considering moving within the next 5 years you need to consider a portable mortgage.
• Not all of mortgages are portable. Some lenders avoid portable mortgages by giving a slightly lower interest rate.
• Please note: when you port a mortgage, you will need to requalify to ensure you can afford the “ported” mortgage based on your current income and any the current mortgage rules.

2. To take equity out
• In the last 3 years many home owners (especially in Vancouver & Toronto) have seen a huge increase in their home values. Some home owners will want to take out the available equity from their homes for investment purposes, such as buying a rental property.

3. To pay off debt
• Life happens, and you may have accumulated some debt. By rolling your debts into your mortgage, you can pay off the debts over a long period of time at a much lower interest rate than credit cards. Now that you are no longer paying the high interest rates on credit cards, it gives you the opportunity to get your finances in order.

4. Cohabitation & marriage & children
• You and your partner decide it’s time to live together… you both have a home and can’t afford to keep both homes, or you both have a no rental clause. The reality is that you have one home too many and may need to sell one of the homes.
• You’re bursting at the seams in your 1-bedroom condo with baby #2 on the way.

5. Relationship/marriage break up
• 43% of Canadian marriages are now expected to end in divorce. When a couple separates, typically the equity in the home will be split between both parties.
• If one partner wants to buy out the other partner, they will need to refinance the home

6. Health challenges & life circumstances
• Major life events such as illness, unemployment, death of a partner (or someone on title), etc. may require the home to be refinanced or even sold.

7. Remove a person from Title
• 20% of parents help their children purchase a home. Once the kids are financially secure and can qualify on their own, many parents want to be removed from Title.
o Some lenders allow parents to be removed from Title with an administration fee & legal fees.
o Other lenders say that changing the people on Title equates to breaking your mortgage – yup… there will be penalties.

8. To save money, with a lower interest rate
• Mortgage interest rates may be lower now than when you originally got your mortgage.
• Work with your mortgage broker to crunch the numbers to see if it’s worthwhile to break your mortgage for the lower interest rate.

9. Pay the mortgage off before the maturity date
• YIPEE – you’ve won the lottery, got an inheritance, scored the world’s best job or some other windfall of cash!! Some people will have the funds to pay off their mortgage early.
• With a good mortgage, you should be able to pay off your mortgage in 5 years, there by avoiding penalties.

Some of these 9 reasons are avoidable, others are not…

Mortgages are complicated… Therefore, you need a mortgage expert!

Give a Dominion Lending Centres mortgage specialist a call and let’s discuss the best mortgage for you, not your bank!

17 Jan

No ban on foreign buyers says BC premier

General

Posted by: Kimberly Walker

The premier of British Columbia has rejected calls for a ban on foreign buyers of real estate in the province.

John Horgan has reacted to the Green Party’s leader Andrew Weaver who has been calling for a ban similar to that implemented in New Zealand.

“I just don’t believe, in an open economy, that’s an appropriate way to proceed,” Mr Horgan said at a news conference Tuesday, adding that a ban would send the wrong message internationally.

He did acknowledge that something has to be done to tackle affordability issues in BC and said that there will be proposals in the budget to curb speculation, reduce demand and soften prices.

Mr Horgan says that the BC government will help boost the construction of rental apartments and single-family homes.

 

https://www.mortgagebrokernews.ca/market-update/no-ban-on-foreign-buyers-says-bc-premier-236401.aspx

12 Jan

New mortgage changes decoded

General

Posted by: Kimberly Walker

This week, OSFI (Office of the Superintendent of Financial Institutions) announced that effective January 1, 2018 the new Residential Mortgage Underwriting Practices and Procedures (Guidelines B-20) will be applied to all Federally Regulated Lenders. Note that this currently does not apply to Provincially Regulated Lenders (Credit Unions) but it is possible they will abide by and follow these guidelines when they are placed in to effect on January 1, 2018.

The changes to the guidelines are focused on
• the minimum qualifying rate for uninsured mortgages
• expectations around loan-to-value (LTV) frameworks and limits
• restrictions to transactions designed to work around those LTV limits.

What the above means in layman’s terms is the following:

OSFI STRESS TESTING WILL APPLY TO ALL CONVENTIONAL MORTGAGES

The new guidelines will require that all conventional mortgages (those with a down payment higher than 20%) will have to undergo stress testing. Stress testing means that the borrower would have to qualify at the greater of the five-year benchmark rate published by the Bank of Canada (currently at 4.89%) or the contractual mortgage rate +2% (5 year fixed at 3.19% +2%=5.19% qualifying rate).

These changes effectively mean that an uninsured mortgage is now qualified with stricter guidelines than an insured mortgage with less than 20% down payment. The implications of this can be felt by both those purchasing a home and by those who are refinancing their mortgage. Let’s look at what the effect will be for both scenarios:

PURCHASING A NEW HOME
When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

Current Lending Guidelines

Qualifying at a rate of 3.34% with a 25-year amortization and the combined income of $85,000 annually, the couple would be able to purchase a home at $560,000

New lending Guidelines

Qualifying at a rate of 5.34% (contract mortgage rate +2%) with a 25-year amortization and the combined annual income of $85,000 you would be able to purchase a home of $455,000.

OUTCOME: This gives a reduced borrowing amount of $105,000…Again a much lower amount and lessens the borrowing power significantly.

REFINANCING A MORTGAGE

A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV.
The maximum amount available is: $560,000 minus the existing mortgage gives you $145, 0000 available in the equity of the home, provided you qualify to borrow it.

Current Lending Requirements
Qualifying at a rate of 3.34 with a 25-year amortization, and a combined annual income of $85,000 you are able to borrow $560,000. If you reduce your existing mortgage of $415,000 this means you could qualify to access the full $145,000 available in the equity of your home.

New Lending Requirements
Qualifying at a rate of 5.34% (contract mortgage rate +2%) with a 25-year amortization, combined with the annual income of $85,000 and you would be able to borrow $455,000. If you reduce your existing mortgage of $415,000 this means that of the $145,000 available in the equity of your home you would only qualify to access $40,000 of it.

OUTCOME: That gives us a reduced borrowing power of $105,000. A significant decrease and one that greatly effects the refinancing of a mortgage.

CHANGES AND RESTRICTIONS TO LOAN TO VALUE FRAMEWORKS (NO MORTGAGE BUNDLING)

Mortgage Bundling is when primary mortgage providers team up with an alternative lender to provide a second loan. Doing this allowed for borrowers to circumvent LTV (loan to value) limits.
Under the new guidelines bundled mortgages will no longer be allowed with federally regulated financial institutions. Bundled mortgages will still be an option, but they will be restricted to brokers finding private lenders to bundle behind the first mortgage with the alternate lender. With the broker now finding the private lender will come increased rates and lender fees.
As an example, we will compare the following:
A dual income family that makes a combined annual income of $85,000 wants to purchase a new home for $560,000. The lender is requiring a LTV of 80% (20% down payment of $112,000.00). The borrowers (our dual income family) only have 10% down payment of $56,000.. This means they will require alternate lending of 10% ($56,000) to meet the LTV of 20%.

Current Lending Guidelines
The alternate lender provides a second mortgage of $56,000 at approximately 4-6% and a lender fee of up to 1.25%.

New Lending Guidelines
A private lender must be used for the second mortgage of $56,000. This lender is going to charge fees up to 12% plus a lenders fee of up to 6%

OUTCOME: The interest rates and lender fees are significantly higher under the new guidelines, making it more expensive for this dual income family.

These changes are significant and they will have different implications for different people. Whether you are refinancing, purchasing or currently have a bundled mortgage, these changes could potentially impact you. We advise that if you do have any questions, concerns or want to know more that you contact a Dominion Lending Centres mortgage specialist. They can advise on the best course of action for your unique situation and can help guide you through this next round of mortgage changes.

9 Jan

Insured, Insurable & Uninsurable vs High Ratio & Conventional Mortgages

General

Posted by: Kimberly Walker

You might think you would be rewarded for toiling away to save a down payment of 20% or greater. Well, forget it. Your only prize for all that self-sacrifice is paying a higher interest rate than people who didn’t bother.

Once upon a time we had high ratio vs conventional mortgages, now it’s changed to; insured, insurable and uninsurable.

High ratio mortgage – down payment less than 20%, insurance paid by the borrower.

Conventional mortgage – down payment of 20% or more, the lender had a choice whether to insure the mortgage or not.

vs

Insured –a mortgage transaction where the insurance premium is or has been paid by the client. Generally, 19.99% equity or less to apply towards a mortgage.

Insurable –a mortgage transaction that is portfolio-insured at the lender’s expense for a property valued at less than $1MM that fits insurer rules (qualified at the Bank of Canada benchmark rate over 25 years with a down payment of at least 20%).

Uninsurable – is defined as a mortgage transaction that is ineligible for insurance. Examples of uninsurable re-finance, purchase, transfers, 1-4 unit rentals (single unit Rentals—Rentals Between 2-4 units are insurable), properties greater than $1MM, (re-finances are not insurable) equity take-out greater than $200,000, amortization greater than 25 years.

The biggest difference where the mortgage consumers are feeling the effect is simply the interest rate. The INSURED mortgage products are seeing a lower interest rate than the INSURABLE and UNINSURABLE products, with the difference ranging from 20 to 40 basis points (0.20-0.40%). This is due in large part to the insurance premium increase that took effect March 17, 2017. As well, the rule changes on October 17, 2017 prevented lenders from purchasing insurance on conventional funded mortgages. By the Federal Government limiting the way lenders could insure their book-of-business meant the lenders need to increase the cost. We as consumers pay for that increase.

The insurance premiums are in place for few reasons; to protect the lenders against foreclosure, fraudulent activity and subject property value loss. The INSURED borrower’s mortgages have the insurance built in. With INSURABLE and UNINSURABLE it’s the borrower that pays a higher interest rate, this enables the lender to essential build in their own insurance premium. Lenders are in the business of lending money and minimize their exposure to risk. The insurance insulates them from potential future loss.

By the way, the 90-day arrears rate in Canada is extremely low. With a traditional lender’s in Canada it is 0.28% and non-traditional lenders it is 0.14%. So, somewhere between 99.72% and 99.86% of all Canadians pay their monthly mortgage every month.

In today’s lending landscape is there any reason to save the necessary down payment or do you buy now? Saving may avoid the premium, but is it worth it? You may end up with a higher interest rate.

By having to wait for as little as one year as you accumulate 20% down, are you then having to pay more for the same home? Are you missing out on the market?

When is the right time to buy? NOW.

Here’s a scenario is based on 2.59% interest with 19.99% or less down and 2.89% interest for a mortgage with 20% or greater down, 25-year amortization. In this scenario, it takes one year to save the funds required for the 20% down payment.

  • First-time homebuyer
  • Starting small, buying a condo
  • 18.9% price increase this year over last

Purchase Price $300,000
5% Down Payment $15,000
Mtg Insurance Premium $11,400 (4% as of March 17, 2017)
Starting Mtg Balance $296,400
Mortgage Payment $1,341.09

Purchase Price $356,700 (1 year later)

20% Down Payment $71,340
Mtg Insurance Premium $0
Starting Mtg Balance $285,360
Mortgage Payment $1,334.40

The difference in the starting mortgage balance is $11,040, which is $360 less than the total insurance premium. As well, the overall monthly payment is only $6.69 higher by only having to save 5% and buying one year sooner. Note I have not even built in the equity that one has also accumulated in the year. The time to buy is NOW. Contact your local Dominion Lending Centres mortgage professional so we can help!