5 Things to know before buying a Rural Property

After several years as a home owner, my friend was set to buy the home of his dreams. He always wanted to own an acreage outside of town. He had visions of having a few animals, a small tractor and lots of space.
As a person with experience buying homes, he felt that he was ready and that he knew what he was getting into. Wrong. As soon as you consider buying a home outside of a municipality there are a number of things to consider, not the least being how different it is to get a mortgage.

Zoning – is the property zoned “residential”, “agricultural” or perhaps “country residential”?

Some lenders will not mortgage properties that are zoned agricultural. They may even dislike country residential properties. Why? If you default on your mortgage the process of foreclosing on an agricultural property is very different and difficult for lenders. Taking a farm away from a farmer means taking their livelihood away so there are many obstacles to this.
If you are buying a hobby farm, some lenders will object to you having more than two horses or even making money selling hay.

Water and Sewerage – if you are far from a city your water may come from a well and your sewerage may be in a septic tank. A good country realtor will recommend an inspection of the septic tank as a condition on the purchase offer. Be prepared for the inspection to cost more than it cost you in the city. Many lenders will also ask for a potability and flow test for the well. A house without water is very hard to sell.

Land – most lenders will mortgage a house, one outbuilding and up to 10 acres of land. Anything above this amount and it will not be considered in the mortgage. In other words, besides paying a minimum of 5% down payment you could end up having to pay out more cash to cover the second out building and the extra land being sold .

Appraisal – your appraisal will cost you more as the appraiser needs to travel farther to see the property. It may also come in low as rural properties do not turn over as quickly as city properties. Be prepared to have to come up with the difference between the selling price and the appraised value of the property.

Fire Insurance – living in the country can be nice but you are also far from fire hydrants and fire stations. Expect to pay more for home insurance.

Finally, if you are thinking about purchasing a home in a rural area, be sure to speak to a Dominion Lending Centres mortgage broker before you do anything. They can often recommend a realtor who specializes in rural properties and knows the areas better than the #1 top producer in your city or town.

– by David Cooke

Reverse Mortgage – the pros and cons

You may be seeing and hearing a lot more regarding the Reverse Mortgage in today’s marketplace. I have taken the time to get familiar with the program here in Canada and have been quite surprised by how it’s changed and how different it is to its counterpart in the U.S. and how relevant it has become given our aging population in Canada.

Who are they best suited for? People age 55+ that own a house, townhouse, or condo and want to either increase their cash flow, or access equity without making a monthly payment. The older the client, the higher the approved limit.

Here is a list of PROS and CONS of the Reverse Mortgage.

Pros

• Funds can be advanced as needed such as a line of credit with interest only accruing on the money advanced.
• No income debt servicing like other ‘standard’ mortgages. Retirees with fixed incomes can qualify for much more money as our approvals are based on age and property.
• No payments required. Borrower can retain more of their income and never worry about default or foreclosure.
• Changes in interest rates don’t affect the client’s monthly cash flow since there no payment required.
• Clients can pay up to 10% towards the loan if they choose each year, but there is no obligation.
• Prepayment penalties are waived upon death and reduced by 50% if the borrower(s) are moving into a care home.
• Borrowers will never owe more than the fair market value of the home at the time it is sold
• There are no changes to the mortgage amount and no payments required if one spouse passes or moves into a care home.
• With conservative house appreciation of just 2.5% to 3% per year over time will typically make up for the accruing interest on the reverse mortgage leaving clients with plenty of equity in the end.

Cons

• Client are choosing to have more income/cash flow TODAY, in return for having less savings in the home TOMORROW.
• All clients are required to obtain independent legal advice, which is a good thing. But there is a small extra cost. Total one-time set up and legal fees run approximately $2,500.
• Rates are approximately 1.5% to 2% higher than a best rate secured line of credit.
• If the housing market never goes up, and the client lives in the home long enough, there is a chance the client could exhaust all the equity in the home to fund their retirement.

If you, a family member, or a contact of yours could benefit from a reverse mortgage or want to learn more, please contact a Dominion Lending Centres mortgage professional who can walk you through the entire process.

– by Michael Hallett

Subject to Financing- A Must!

With most people who are new to real estate and looking for their first home (or possibly second), one of the most significant times is when your offer to buy is accepted by a seller. Unfortunately, that moment is quickly followed by stress, as not many people know what comes next- securing financing. 99% of the time a realtor will ask you if you have been qualified by a bank or a mortgage broker before they write an offer on your behalf. What should be told to you, the client, by the realtor and your mortgage broker is that you need to have a subject to financing condition in your offer.

In order for someone to receive a mortgage from a lender, they need to meet the lender’s (and some times the insurer’s) conditions. Usually, these all revolve around a borrower’s down payment money, their income as well as employment, and the property they are making an offer on. If you make an offer on a home and it is accepted, but for example the lender doesn’t like the property because the strata board doesn’t have enough money in their contingency fund to fix the leaking roof in the next 12 months, they could turn down your application and not lend you money.

If you don’t have the money, you don’t get the home. That is why you have a subject to financing condition, so if for any reason, you can’t meet the lender’s requirements with your income, down payment, or if the property is unacceptable to them or the insurer, you can cancel your offer without any hassle or loss of deposit.

What happens if you make a subject free offer? If you make an offer on a home and it doesn’t have a subject to financing condition in it, that house is now yours once the offer is accepted. Your deposit is no longer yours, and you have to come up with the remaining money. If you cannot and are unable to complete the purchase, the seller may file a lawsuit against you for damages as they have now taken their home off the market potentially losing out on the ability to sell their home to someone else while they waited for you to get financing.

Always, always, always have a condition in your offer that states subject to financing and allow yourself 3 to 5 business days. If you go in without that fail safe and it turns out you really need it, you will potentially be on the hook and if the seller wishes, he or she can sue you for any potential losses. Subject to financing is a must! If you have any questions, contact a Dominion Lending Centres mortgage professional.

– by Ryan Oake

CMHC Changes to Assist Self-Employed Borrowers

As a self-employed person myself, I was happy to hear that CMHC is willing to make some changes that will make it easier for us to qualify for a mortgage.
In an announcement on July 19, 2018, the CMHC has said “Self-employed Canadians represent a significant part of the Canadian workforce. These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates.” — Romy Bowers, Chief Commercial Officer, Canada Mortgage and Housing Corporation. These policy changes are to take effect Oct. 1, 2018.

Traditionally self-employed borrowers will write as many expenses as they can to minimize the income tax they pay each year. While this is a good tax-saving technique it means that often a realistic annual income can not be established high enough to meet mortgage qualification guidelines.
Plain speak, we don’t look good on paper.

Normally CMHC wants to see two years established business history to be able to determine an average income. But the agency said it will now make allowances for people who acquire existing businesses, can demonstrate sufficient cash reserves, who will be expecting predictable earnings and have previous training and education.
Take for example a borrower that has been an interior designer with a firm for the past eight years and in the same industry for the past 30 years, but just struck out on his own last year. His main work contract is with the firm he used to work for, but now he has the ability to pick up additional contracts from the industry in which he has vast connections.
Where previously he would have had to entertain a mortgage with an interest rate at least 1% higher than the best on the market and have to pay a fee, now he would be able to meet insurance requirements and get preferred rates.

The other change that CMHC has made is to allow for more flexible documentation of income and the ability to look at Statements of Business Professional Activity from a sole-proprietor’s income tax submission to support Add Backs of certain write-offs to support a grossing-up of income. Basically, recognizing that many write-offs are simply for tax-saving purposes and are not a reduction of actual income. This could mean a significant increase in income and buying power.

It is refreshing after years of government claw-backs and conservative policy changes to finally see the swing back in the other direction. Self-employed Canadians have taken on the burden of an often fluctuating income and responsible income tax management all for the ability to work for themselves. These measures will help them with the reward of being able to own their own home as well.

– by Kristin Woodland

Homes for Heroes – Our House Magazine

A Calgary-based charitable foundation is set to break ground on a first-of-its-kind development aimed to help Canadian veterans, one tiny home at a time.

If Dave Howard had his way, the tiny home community project he has planned to help house homeless military veterans in Calgary would be in every major city across Canada.
As the president and co-founder of Homes for Heroes Foundation, a non-profit society, his idea is actually a pretty simple one. Take roughly 20 or 30 tiny homes, about 300 square feet in size, put them together on a small piece of land in the city and offer services like counseling and resources to help these war heroes get back on their feet.

Howard’s vision took a big step forward this spring when Homes for Heroes Foundation announced the first-of-its-kind community would soon break ground in Calgary’s Bridgeland community, on sub-leased land from the Canadian Institute for the Blind.

The first village will feature 20 tiny homes, a resource centre, and community gardens. Each tiny home will also include a memorial plaque in honour of a Canadian soldier who lost their life serving in Afghanistan.
The project for Howard is the culmination of a dozen years of charitable involvement in helping veterans in his community. And it’s definitely personal.

He became dedicated to the plight of veterans after an overnight stay with his estranged grandfather, a former Navy member. At the time, his grandfather was sleeping on a coach in a 200 square-foot room, having battled alcoholism once he returned to civilian life. While Howard explained his grandfather worked his way up to be president of a major company, he came back from service suffering from shell shock and fell all the way to the bottom because of alcohol.

Howard discovered is grandfather, who by this time was a security guard for the building of the company he was formerly president, had resorted to eating dog food out of can, and it shook him to the core.
“I realized there needed to be something done differently for veterans that are living in poverty and to help them get out of that.”
So 12 years ago, Howard started the Canadian Legacy Project which was tasked with advocating for Canadian veterans and creating programs to improve their lives.
The organization then partnered with Murray McCann and McCann family Foundation, a charity that funds a number of initiatives including the Field of Crosses Memorial Project and the placement of 500 crosses in a park on Memorial Drive, near downtown Calgary. Out of that partnership came Homes for Heroes.

Howard said they started looking at was being done for the veterans struggling to return to civilian life, and there wasn’t much. There were scattered facilities, but he found none that were offering full support services.
That’s when the two organizations came up with the idea of a community of tiny homes. As Howard explained, when veterans get accepted into the community, they’ll go through a detailed needs analysis and be provided counseling to help them get back to civilian life. The eventual goal is to have them get back to work and into a more permanent housing solution. Calgary-based The Mustard Seed will manage the social services, while residents will pay about $500 a month rent to live in each unit. Howard noted the rent will help cover the cost to maintain the community.

He said these 300 square foot units will have all the amenities of a larger home, but are also the perfect size for someone coming off the streets.
“The idea is for them to have their own space that is significant enough to have a guests over but it’s also part of a community,” Howard said, adding he believes the problem of homeless veterans could be solved within six years with this type of community.

There are an estimated 2,500 homeless veterans in Canada, and another 160 in Calgary. However, Howard believes the number is much higher suggesting most veterans don’t like to self-identify out of pride and fear of losing what benefits they might have.
There are plans for a second community in Calgary and also one in Edmonton. The first project is expected to cost about $2 million to build and another $500,000 in a trust to keep the community operating in the future. Much of the funding comes from private companies including a $1.5 million donation from ATCO, an Alberta-based energy and logistics company.

Howard is confident the model could work cross the country and he’s hoping to eventually see two tiny communities helping veterans in each major city across Canada. And he’s urging municipalities across the country to take note of the model, noting cities would only need to lend a portion of unused land for a few years. The communities can be erected and then dismantled in only a few short months.
“It is an answer to a lot of other issues,” he said. “This can fit a lot of demographics and I think municipalities would be wise to look at it and say ‘we should be doing this.’”

The project is drawing praise from local organizations that work with veterans, including Calgary’s Royal Canadian Legion Poppy Fund.
John Rathwell, the general manager of the poppy fund and veteran’s food bank, believes the model will be successful in helping veterans get back on their feet.
“Veterans are a proud sort, no veteran I know likes to ask for help,” he said. “This assistance, giving them a place of purpose and even training and support within their own pier groups… can help them move on whether it be through job counseling, mental and physical issues, and just giving them a sense of belonging.”
“This place will be important because it will now be a place they can call their home,” Rathwell said. “They were living on the streets where nobody knew or cared who they were and they’ll be able to take pride and help regain their self-esteem and be able to successfully transition back into civilian life.”

– by Jeremy Deutsch

Refinances, Renewals & Transfers

After you have purchased your new home, closed on your new mortgage, and are all moved in, what comes next?

Well, when it comes to your mortgage, the next step is to either refinance, renew, or transfer your mortgage. This decision can be made one month into your new mortgage or one month before your new mortgage is set to mature. Below is a break-down on what a refinance, renewal, and transfer mean.

Refinance
Refinances are when you decide to access the equity in your home. When your home rises in value, say $400,000 in 2016 to $500,000 in 2021, you can request your current lender, or a new lender, to pay you a portion of that increase in cash and they will in turn add that same portion to your mortgage for you to pay back- with interest.

There are many reasons to refinance; for home repairs, purchasing second properties, financial assistance with other outstanding loans or to have access to cash for larger purchases. It is only a refinance when you change the amount of your mortgage and borrow against the equity you have in your home.

Renewal
Renewals are quite straight forward. At the end of your mortgage term, your lender will offer you a renewal letter stating the remaining balance on your mortgage, what the remaining amortization is, and what interest rate options they can offer you.

The term can be 5-years for example, but most mortgages are on what’s called a 25-year amortization- the length of time it takes to pay off the entire mortgage. The 5-year term is just a length of time you are guaranteed a certain rate before you need to renew it. Renewals generally do not require any re-approval, documents, or applications as no new money is being added, the property is the same, and so is the lender. It is straight forward and allows you to continue paying your mortgage, just on a different interest rate.

Transfers
Transfers are a lot like renewals, the one difference is you are switching lenders. You are not adding more money, selling or buying a new home, everything is remaining the same except who you are paying interest to. One reason someone may want to transfer their mortgage from one lender to another is bad customer experience. Another could be to take advantage of a lower interest rate. Another reason could also be to take advantage of a lender’s product like a Home Equity Line of Credit or high pre-payment privileges.

Transfers are becoming more and more common as lenders are constantly looking to add clients and customers to their brand, being able to take advantage of interest payments as well as offer other products.

If your mortgage is up for renewal or you have been thinking about what kind of options may be available to you with your current mortgage, please reach out to a Dominion Lending Centres mortgage professional to discuss the different choices you have.

– by Ryan Oake

5 Reasons why every realtor needs a mortgage broker at their open houses

Realtor Safety – While we do not have the safety issues that realtors experience south of the border, there have been incidents involving female realtors being assaulted or feeling uncomfortable being alone with strangers walking around the house.

Property Safety – Did you know that when a realtor is holding an open house they are liable for any losses or damage to the property? It’s pretty easy to have one person distract the agent upstairs while their partner runs off with the flat screen TV or the silverware. Another person in the property discourages theft and can make the realtor feel safer.

Snagging new clients – sometimes people show up at open houses without any preparation. They may like a home but they have no idea whether they could afford it. Enter the mortgage broker- by being on the premises you can quickly pre-approve these prospective buyers giving the realtor an opportunity for a quick sale and to double end the deal.

Third Party Feedback – sometimes visitors are reluctant to say anything negative about a property to a realtor but are more open with their financial partner. The realtor can benefit from both the mortgage broker’s opinion and anything that they hear from visitors.

Programs that can help sell a home – some municipalities offer subsidized down payments for first time home buyers, others offer tax incentives . If a prospective buyer comments on the worn carpeting or the lack of a garage, it’s a good time for the mortgage broker to mention Purchase Plus Improvements programs available. The realtor may be aware of the programs but unaware of the program rules. The realtor will be really happy to have a mortgage broker find a solution to one sales objection and help them sell the house.

– by David Cooke

Breaking a mortgage – can you do it?

Do you have a mortgage? So do I! Looks like we have something in common. Did you know that 6 out of 10 consumers break their mortgage 38 months into a 5-year term? That means that 60% of consumers break a 5-year term mortgage well before it’s due…but do you also know what the implications are of this? Let’s take a look!

People need to break a mortgage for a variety of reasons. Some of the most common include:

· Sale and purchase of a new home *without a portable mortgage
· To take equity out/refinance
· Relationship changes (ex. Divorce)
· Health challenges or life circumstances are altered

And a whole other variety of reasons. So what happens if you have one of the above reasons, or one of your own occur and you have to break your mortgage? Here is an example of what would happen:

Jane and John Smith have lived in their home for 2 years now. When they bought the home, they recognized that it would need some major renovations down the road, but they loved the location and the layout of the home. They purchased it for $300,000 and have 3 years left but would like to access some of the equity in their home and refinance the mortgage to afford some of the bigger home renovations. This refinancing would be with 3 years left on their current mortgage. So, what are Jane and John looking at for cost? There are two methods that are used to calculate the penalty:

POSTED RATE METHOD (used by major banks and some credit unions)
With this method, the Bank of Canada 5 year posted rate is used to calculate the penalty for Jane and John. Under this method, let’s assume that they were given a 2% discount at their bank thus giving us these numbers:

Bank of Canada Posted Rate for 5-year term: 5.14%
Bank Discount given: 2% (estimated amount given*)
Contract Rate: 3.14%

Exiting at the 2-year mark leaves 3 years left. For a 3-year term, the lenders posted rate. 3 year posted rate=3.44% less your discount of 2% gives you 1.44% From there, the interest rate differential is calculated.

Contract Rate: 3.14%
LESS 3-year term rate MINUS discount given: 1.45%
IRD Difference = 1.7%
MULTIPLE that by 3 years (term remaining)
5.07% of your mortgage balance remaining. = 5.1%

For the Smith’s $300,000 mortgage, that gives them a penalty of $15,300. YIKES!

Now, Jane and John were smart though and used their Dominion Lending Centres broker to get their mortgage. Because of this, a different method is used.

PUBLISHED RATE METHOD (used by broker lenders and most credit unions)

This method uses the lender published rates, which are generally much more in tune with what you will see on lender websites (and are generally much more reasonable). Here is the breakdown using this method:

Rate when you initially signed: 3.24%
Published Rate: 3.54%
Time left on contract: 3 years

To calculate the IRD on the remaining term left in the mortgage, the broker would do as follows:

Rate when you initially signed: 3.24%
LESS Published Rate: 3.54%
=0.30% IRD
MULTIPLE that by 3 years (term remaining)
0.90% of your mortgage balance

That would mean that the Smith’s would have a penalty of $2,700 on their $300,000 mortgage

A much more favourable and workable outcome! Keep in mind that with the above example is one that works only if the borrower has:
· Good credit
· Documented income
· Normal residential type property
· Fixed rate mortgage

For Variable rates mortgages, generally the penalty will be 3 months interest (no IRD applies).

If you find yourself in one of the scenarios that we listed at the start of this blog, or if you just need to get out of your mortgage early, be smart like Jane and John—review your options with a DLC Broker! In the example above, it saved them $12,600 to work with a broker! It really does pay to have a Mortgage Broker working for you.

– by Geoff Lee

Porting a Mortgage?

Porting a mortgage is something similar to transferring a mortgage. Transfers are when you move your current mortgage to a different lender in order to take advantage of different interest rates or mortgage products.

Porting a mortgage is when you keep your lender, but move your mortgage to a different property. Now, not every lender allows you to port a mortgage, and not every property can qualify for a port.

One of the other things to keep in mind with porting a mortgage, you are generally only porting the balance remaining on your mortgage. If you need more money, you will need to re-qualify to blend your mortgage. If you do not want to blend and extend your mortgage term, you will need to come up with the additional funds on your own.

The ability to port a mortgage is really important, especially if you are in a fixed mortgage with a big bank, as it can be used to avoid paying a pre-payment penalty to break your mortgage early.

If you are curious to hear more about portability options and whether or not you could qualify, please reach out to a Dominion Lending Centres mortgage professional today!

– by Ryan Oake

Rising Interest Rates and the Impact on Real Estate Values

Rising Interest Rates and the Impact on Real Estate Values. Is there a direct connection? In a post entitled Interest Rates and Property Values. What’s the Connection?, I suggested that there was. An example was given which suggested that mortgage lenders would be directly impacted by a rise in rates, as their underwriting parameters, most notably debt service coverage requirements, are directly impacted. An inability for a buyer to secure the required financing amount, in an environment of increasing interest rates will, I argue, impact their willingness to offer as high a purchase price. Arguably a lower debt level will necessitate a greater amount of equity. This directly diminishes an investors cash-on-cash return. The inevitable result will be a softening of values, since buyers will want to offer less.

Are there Other Factors?
The above noted rationale, for establishing the link between interest rates and values, does however ignore other factors which may impact market sentiment.

A recent study by Manulife Asset Management raises some interesting observations. In their March 2018 report entitled Canadian Commercial Real Estate Outlook, Manulife’s study observed that in fact there was no consistent relationship between real estate values and interest rates. One of their important findings was that although interest rates have been rising since November 2016, largely as a result of economic growth and higher inflationary pressure, capitalization rates actually declined. Why? Well apart from the sentiments of an individual buyer and lender, which is what I referenced in my earlier post, Canadian investors enjoyed improving real estate fundamentals. Yields were seen to be attractive in comparison to other investments, and there was a rise in foreign investment. All contributed to a support for commercial real estate fundamentals and stable or enhanced values.

Capitalization Rate Refresher
You may recall that capitalization rates are comprised of a nominal “risk-free” rate (often associated with a Government of Canada benchmark bond yield), plus a risk premium attributed to a specific property type or asset. If, as it appears, overall capitalization rates have declined, could it be that the “risk-free” rate is falling as well? I will encourage you to take a look at the Manulife report and come to your own conclusions. From a lender’s perspective, I do not doubt that rising rates have a bearing on what a buyer will pay for a property. I suspect real estate appraisers will be like-minded. The Manulife study does however caution us that there are macro-factors at play as well, and a strong economy is supportive of longer term stability, and indeed growth, in the Canadian Commercial real estate market.

– by Allan Jensen