Insured, Insurable & Uninsurable vs High Ratio & Conventional Mortgages

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!

By: Michael Hallett

How Compound Interest Can Work For You

I remember the first time I learned about how compound interest can work for you. I was introduced by a friend to someone in the financial services industry and he explained a simple technique to easily calculate how compound interest can work for you – the Rule of 72. I was so excited and started running numbers. I was really amazed that I never once learned this in school. How could we miss such an important bit of information?

Grim Reaper Be Damned! How “Living Gifting” Keeps the Grim Reaper at Bay

Sorry Mr. Reaper, we’ve just figured out another way to delay your death grip! Research shows that giving an inheritance to another person while you’re alive – a concept known as “living gifting” – not only feels good, it can promote better physical and mental well-being and even help you live longer.

Health researcher and best-selling author, Stephen G. Post, summarizes it nicely:

“A remarkable fact is that giving, even in later years, can delay death. The impact of giving is just as significant as not smoking and avoiding obesity.”

Still not convinced? Here are 5 Powerful reasons to consider giving an early inheritance:

1. We Are Living Longer – According to Statistics Canada, for a 65-year old couple there is a one-in-two chance that one of them will reach the age of 92. Do your children really need an inheritance when they are in their mid-to-late 60’s?

2. Pay Down Their Mortgage – Let’s say mom & dad gave their son $200,000 to pay down his existing mortgage. A $200,000 gift, amortized over 25 years, is really worth over $340,000 when you factor in the interest he’ll be saving. And paying down the son’s mortgage will lower his monthly mortgage payments, providing extra cash-flow to start saving for his retirement or university education for his children. The mortgage professionals at Dominion Lending Centres can help with a variety of mortgage options.

3. Time Value of Money – Money that is available today, is worth more than the same amount in the future, due to its earning capacity. Of course, if the money doesn’t earn anything, then this principal does not hold true. Using the above example, let’s say the son invested the $200,000 gift with a conservative 5% target rate of return over 25 years. Using a 25% marginal tax rate, that $200,000 gift is really worth $502,033 – even after deducting income taxes!

4. Save on Probate – In Ontario, the value of the estate is reduced by an encumbrance against the property. In the above example, if the parents took out a mortgage, or a reverse mortgage, to give their son a $200,000 gift, then that debt reduces the value of the estate, which will result in the estate paying less in probate fees (the taxes you pay on the settling of an estate).

5. Create Lasting Memories – After you are gone, the actual dollar amount you leave to your children will soon be long forgotten. What your children will remember is the time they spent with you. So, the next time you suggest a family trip to Disneyland, or a weekend getaway, and they tell you “let’s do it next year when we’ll have enough saved”, if you have the means, consider booking the trip as part of an early inheritance. Create lasting memories while your health allows you to, because after all, “Procrastination is the thief of time” – Charles Dickens

By: Roland Mackintosh

How To Properly Calculate Your Mortgage

Calling all house hunters! We have a question for you—have you calculated what your mortgage will be? It is all too common for buyers to start house hunting before they truly know what their mortgage payment will work out to each month. This leads to homeowners being in over their heads. We believe in being proactive, not reactive, so today we are walking you through the steps necessary to calculate your mortgage.

There are a number of factors contributing to your mortgage calculation. These include:

1. Which Type of mortgage you choose (fixed or variable)

2. When you are purchasing your new home

3. The current interest rates

The key one out of those three are the interest rates. Interest rates vary on a daily basis and it is always recommended to pay attention to the current rates and future trends so that you can get the best deal. One very useful tool is an interest rate calculator.

An effective interest rate calculator can be an invaluable tool for those considering the possibility of buying a home. It gives you a chance to input your specific financial information as well as the current interest rate and other mortgage specifics in order to produce the amount of the payments you will make. Because different types of mortgages offer different options and specifics, the amount of interest that is charged will vary from loan to loan.

It is always a good idea to examine the different options available before making your choice. By inputting your specific information, you are better able to compare and contrast the different types of loans as well as interest rates to help determine which the best option for you is. Being able to look at the financial possibilities and outcomes of each of the different loans available to you is the best way to figure out what type of loan will work.

The annual interest rate calculator can be used to break down the amount of interest paid on your mortgage on a yearly basis. This will help you determine the anticipated yearly costs.

Annual interest rate calculators can also help you see how much could be saved by paying off a mortgage at an earlier date.

Speaking to a Dominion Lending Centres mortgage professional is always a great way to learn more about what options you have and how to make the best choices. They will work with you from the very start of this process right till the very end. Our goal is to make it as easy on you as possible; while still getting you the sharpest rate out there! Contact us today to get started!

By: Geoff Lee

Your Mortgage is More than a Rate

The mortgage process can seem huge and overwhelming. It can be an emotional process because a mortgage is the loan you are taking to buy a home for yourself and your family which makes it infinitely more than just a loan. Or it may represent the loan you are taking to refinance your home to invest in business dreams or to clean up some debts after life has thrown you sideways.

Likely you will head out to get your loan and, if you are human, are probably nervous about the whole process and whether you will even be approved. The new guidelines brought into place by the federal government have made it harder and you may even feel that you deserve a medal by the end of the process after jumping through all the hoops. The other part of the process is that we are inundated with information and we want to make sure that we are choosing the best mortgage that will protect us now and in the future. The easiest measure of mortgage ‘victory ‘seems to be the interest rate we are offered. What rate did you get is a hot topic after a home is purchased and it seems a no brainer that the one with the lowest rate is the clear cut winner in that conversation, but it is time to challenge that assumption and to do so we are going to look at just two normal situations. The fact of the matter is that you need to look beyond rate. Of course it is important as the lower the rate, the lower your payment but at the end of the day there is more to it than rate.

The Case of the Mortgage Penalty

Client is a regular person. Good credit, saved up the down payment and is ready to purchase a home. Receives two offers for the mortgage both at the best rate of the day. Chooses option A through her home bank as she likes the ‘security’ of bricks and mortar locations. Fast forward to down the road and sadly the client is separating and needs to payout the mortgage. Had she thought to ask she would have known that the penalty is calculated very differently from lender to lender and she would have saved herself thousands; this information is readily available online and asking questions before signing is the way to go.

The Case of the Self Employed

Client is a hard working tradesman guy who has saved 15% to put down on a home but needs to state his income given that he cannot verify it traditionally. Option A takes him to a mainstream lender who has to go through the mortgage insurer. Option B takes him to a B lender who will not through the insurer but charges a higher rate and a fee.

Let’s assume a mortgage amount of $250,000

Lender A – Rate is 2.79% for a 2 year term and the mortgage insurance fee is 3.75%

Lender B- Rate is 4.89% and the lender fee is 1%

It seems simple until you realize that the difference between the two fees is $7,235 and even though he will pay a higher amount monthly, he will actually owe $3,000.57 less at the end of the term as he borrowed less overall. So there was no so called victory in achieving the lowest rate but the client did in fact save himself a lot of money.

The point is that your mortgage is made up of far more than a rate and the onus is on you to make sure you are getting the best mortgage overall even if you lose the water cooler bragging rights. As you can see in just two examples, there is a lot of money that can be saved. Be sure to contact your local Dominion Lending Centres mortgage professional who can help you find the right mortgage for you.

By: Pam Pikkert

Advice for Single Homebuyers

More than a third of first-time homebuyers in Canada are single. If you’re thinking of joining this group, here’s what you need to do and know before jumping into homeownership.

Study the market.

Identify neighbourhoods you want to live in and check to see how much properties in that area are selling for.

Next, figure out how much you can afford. Remember to include estimates for property tax, utilities, insurance and any other expenses you don’t pay as a renter (condo fees, for example). Start with this calculator.

Assemble your team.

A home purchase should involve financial, legal and real estate professionals. Before first-time homebuyers start exploring properties, they should get a copy of their credit report (www.equifax.ca) and examine it closely.

If there is a history of missed or late payments, both of which can bring your number down, start a plan to change your standing by making regular payments on time. (Caution: there is no quick fix for a credit report; beware of companies that offer to change or “fix” yours for a fee.)

If you don’t already work with a financial advisor, consider booking a meeting with one. Reviewing your entire financial picture—debts and assets, insurance and investments, as well as budgets—is something that a professional can help you understand and offer strategies to improve.

Ramp-up savings.

Pare back expenses before making a home purchase. Why? Finalizing the deal on homeownership will include one-time expenses (closing costs and land transfer taxes, for starters) that need to be paid before move-in day. Homeownership will also bring new on-going expenses (such as property tax and utilities).

Subtract what you currently pay for housing from the estimated cost of living in the new home. Put the difference in a high-interest savings account. Here is a test: if you can make that payment every month, then you likely can afford the home you have your eye on. For tips on creative ways to save for a down payment go to read:

Consider help from family.

According to a recent Genworth Canada First-Time Homeownership Survey, first-time homebuyers in Toronto and Vancouver tend to have higher down payments than buyers in other parts of the country. That is due partly to larger savings of buyers in those areas, but also to larger gifts and loans from family.

A gift or loan from family can be a great help, but this is an arrangement that shouldn’t depend only on a hug and a handshake. Consider drawing up a contract spelling out the specifics of the deal.

How much money is being provided? Does it need to be paid back and, if so, when? If your family member will be sharing the home with you, how much will each of you be putting towards regular expenses, the down payment, or the closing costs? In whose names will the utility bills be set up, and whose name will be on the property title?

Hire a lawyer to do this paper work. That doesn’t have to involve many billable hours, especially if, before meeting the lawyer, you have an open conversation with your family and agree on answers to the above.

Another avenue worth exploring is the Genworth Canada Family Plan, which is meant to help another family member get into a home for a variety of reasons, including a parent who wishes to help an adult entrepreneurial child buy a home, or a parent helping to buy a home for an adult child at a post-secondary educational facility. With the Family Plan it’s important to note that the individual occupying the home must be on title to the property along with the co-applicant. This is not intended for use as a secondary dwelling. The down payment must be from their own resources, so gifts are ineligible.

Protect yourself

Although 35% of first-time homebuyers are buying on their own, many will partner up later.

If you start a relationship and allow another person to move into your home, that person may eventually have legal rights in relation to your home. How does that happen? If you live together long enough, you and your partner may become common-law spouses and that may trigger rights and responsibilities for you both.

When do you and your partner go from couple to common-law? The amount of time you spend living together is the main determining factor and varies from province to province.

How can first-time homeowners protect themselves? With an honest conversation about expectations and specific responsibilities. The main question is what will happen to the home if you split up? Consider a cohabitation agreement (again, with the help of a lawyer) to cover everything you agree to verbally.

Make sure to also outline the nitty-gritty details of day-to-day finances: how will you split the regular bills and when will they be paid? Which one of you will be responsible for making sure those payments are made on time? If there is a major expense, such as a roof repair or furnace replacement, will you both contribute?

For more tips on creative ways to save for a down payment go to www.homeownership.ca and speak with your Dominion Lending Centres mortgage professional.

By: Marc Shendale

Banks & Credit Unions vs Monoline Lenders

We are all familiar with the banks and local credit unions, but what are monoline lenders and why are they in the market?

Mono, meaning alone, single or one, these lenders simply provide a single yet refined service: to fulfill mortgage financing as requested. Banks and credit unions, on the other hand, offer an array of other products and services as well as mortgages.

The monoline lenders do not cross-sell you on chequing/savings account, RRSPs, RESPs, GICs or anything else. They don’t even have these products and services available.

Monolines are very reputable, and many have been around for decades. In fact, Canada’s second-largest mortgage lender through the broker channel is a monoline lender. Many of the monoline lenders source their funds from the big banks in Canada, as these banks are looking to diversify their portfolios and they ultimately seek to make money for their shareholders through alternative channels.

Monolines are sometimes referred to as security-backed investment lenders. All monolines secure their mortgages with back-end mortgage insurance provided by one of the three insurers in Canada.

Monoline lenders can only be accessed by mortgage brokers at the time of origination, refinance or renewal. Upon servicing the mortgage, you cannot by find them next to the gas station or at the local strip mall near your favorite coffee shop. Again, the mortgage can only be secured through a licensed mortgage broker, but once the loan completes you simply picking up your smartphone to call or send them an email with any servicing questions. There are no locations to walk into. This saves on overhead which in turn saves you money.

The major difference between a bank and monoline is the exit penalty structure for fixed mortgages. With a monoline lender the exit penalty is far lower. That is because the banks and monoline lenders calculate the Interest Rate Differential (IRD) penalty differently. The banks utilize a calculation called the posted-rate IRD and the monolines use an IRD calculation called unpublished rate.

In Canada, 60% (or 6 out of every 10) households break their existing 5-year fixed term at the 38 months. This leaves an average 22 months’ penalty against the outstanding balance. With the average mortgage in BC being $300,000, the penalty would amount to approximately $14,000 from a bank. The very same mortgage with a monoline lender would be $2,600. So, in this case the monoline exit penalty is $11,400 less.

Once clients hear about this difference, many are happy to get a mortgage from a company they have never heard of. But some clients want to stick with their existing bank or credit union to exercise their established relationship or to start fostering a new one. Some borrowers just elect to go with a different lender for diversification purposes. (This brings up a whole other topic of collateral charge mortgages, one that I will venture into with another blog post.)

There is a time and a place for banks, credit unions and monoline lenders. I am a prime example. I have recently switched from a large national monoline to a bank, simply for access to a different mortgage product for long-term planning purposes.

An independent mortgage broker can educate you about the many options offered by banks and credit unions vs monolines.

By: Michael Hallett