Bank or Mortgage Broker?

Mortgages are like vehicles. A bank is similar to the brand, Ford or Toyota for example. How long you have a mortgage before it’s time to renew is like the model, a Fusion or Camry. The rate is similar to the car’s paint color, and the mortgage benefits such as prepayment privileges and portability are like the car’s benefits; 4-wheel drive, hatchback, four doors instead of two, etc.

A bank is like a sales person at a Ford or Toyota dealership. He or she is an expert, they know everything about every car on their lot; engine size, warranty, all available colours, and their fuel ratings. He or she can match any car to your needs and lifestyle, as long as it’s sold at their lot.

But what if they don’t have the most fuel efficient car? What if you don’t like the design or you need four doors and a trunk and all they have is two doors and a hatchback? Are you still going to buy from that dealership just because you went there first? No, you’re going down the street to check out the Chevrolet, maybe even BMW, Mazda, or the new Chrysler dealership. That sales person doesn’t want you to go buy from another lot down the street, but you are buying to satisfy your needs, not the dealership’s needs of selling their own cars.

Now imagine a dealership that sold every single make and model of vehicle. Imagine you could choose one of their sales people, and have them work only for you. They know just as much or even more about every make and model, they do all the research for you and tell you what you need to look for, they ask you the important questions; they have your best interest. That is a mortgage broker, your own personal expert.

Now, you may not need a personal expert to buy a car. But what about mortgages? Is a 0.10% lower interest rate a lot? Or will a 20% prepayment privilege instead of 10% be more advantageous? Can you switch lenders and move your mortgage? $15,000 or $5,000 penalty? How is it calculated? Fixed or variable? Is a collateral charge good or bad? 2-year term or 5-year? Big bank or monoline lender? How about credit unions? The list goes on.

So, a bank or mortgage broker? Put it this way; would you buy from the first dealership you visit or hire an expert? If you have any questions, contact a Dominion Lending Centres mortgage professional near you.

– by Ryan Oake

Legalized Marijuana and the Canadian Housing Market

October 17th will be an important day in Canada’s social history. It’s the day when we are going to have legalized marijuana across the country. We will be the second major country in the world to do this. How does this affect mortgage brokers like myself? When someone comes to me to obtain financing for a home purchase and the sellers have disclosed that they smoked pot in the house or grew a few plants , how will this affect their home purchase?

A few years ago, someone disclosed that their home had been a grow-op six years previously and their home insurance company cancelled their policy citing safety issues. I could see this happening with both lenders and mortgage default insurers like CMHC, Genworth and Canada Guaranty. A recent article by a member of the Canadian Real Estate Association suggested that both lenders and insurers might ask for a complete home inspection. It was suggested that sellers who have grown a few plants might want to get a head of a problem and have an inspection before they list the property. If there are any issues of mold or electrical systems that are not up to code, they can remedy this and have a quick sale.

I contacted both CMHC and Genworth Canada to find out if any policy changes are in the works. CMHC told me that there’s nothing planned beyond what is already on the books. If there’s been a grow operation it needs to be inspected and remediation done before they will insure. Genworth says that nothing has been announced as of yet. Any changes will result in an official announcement to all brokers.
Mortgage brokers may want to call their realtor referral partners and discuss this with them to see if local real estate authorities have any changes planned. If nothing else it will be good to touch base with your realtors to find out how the market is in your area.

If you are thinking about smoking pot in your home or want to grow a few plants , contact your local Dominion Lending Centres mortgage professional first to find out if this could affect your house value or sale in the future.

– by David Cooke

A bride and a mortgage broker – Our House Magazine

Dominion Lending Centres’ leading lady in the new national commercial campaign has a few questions of her own. As a young Canadian looking to get into the housing market, Laura Steponchev has a candid Q&A with one of our pro’s.

You could say Laura Steponchev is a pretty typical Canadian millennial. The aspiring actress moved to Toronto from Regina five years ago to pursue her career. And over the years, she’s moved around quite a bit. Steponchev lived on her own for a while, and loved it, but paying the bills was tough and she needed to be more reasonable. She got a roommate, but he moved in with his fiancé, and she moved out of that condo and into an old house in Greektown with four other roommates. She eventually met her boyfriend, and they soon moved in together. The couple decided they wanted a place of their own, so they moved into his parents’ house in the ‘burbs.
“Living with your partner comes with its own troubles, but living together with your inlaws – that’s a whole new ballgame,” she said.
Steponchev wants to get into the market, but she’s got a lot of questions.

Our House Magazine teamed up with Dominion Lending Centres mortgage broker to answer some of those questions and help Steponchev on the path to homeownership.

Q. I understand that first-time homebuyers are granted a five-per-cent down payment – I am not a first-time buyer any more. What am I looking to save for a down payment now?
A. First-time homebuyers are not the only ones who can purchase a home with as little as five per cent down. As long as the home you are purchasing will be your residence, you can still put only five percent down. But all lenders and mortgage insurers (CMHC, Genworth and Canada Guaranty) will want you to have an additional 1.5 per cent of the purchase price to ensure you can cover closing costs such as legal fees, Property Transfer Tax, Land Title registration etc.

Q. What’s the minimum down payment you would recommend to have before looking?
A. As long as you have the minimum five per cent down and 1.5 per cent of the purchase price for closing costs, that’s all a lender and mortgage insurer will want you to have. However, I recommend having a bit more as a buffer against unexpected costs. Remember, with a move there are utility hook-up costs, moving costs, home inspection and so on. Having an additional $5,000 above your down payment and lender-required 1.5 per cent will help make it a smoother move.

Q. What kinds of interest rates are we looking at?
A. Rates will vary day-to-day, but we are still at almost historical lows right now, and they are on the rise. Rates are offered and guaranteed for a period of time called a term. Terms can vary from one to 10 years with some lenders and are priced according to each individual lender’s pricing structure.
The most popular are five-year fixed and five-year variable. Where right now we see five-year fixed rates as low as 3.04 per cent and five-year variable rates as low as 2.36 per cent for qualified applicants, be aware that it is not all about rate. Some of the more appealing lower rate offerings come with additional terms that may not work for you, such as higher penalty structures or bona fide sale clauses that could have you stuck if you want or need to pay out your mortgage mid term.
As always, it is advisable to speak with an experienced mortgage broker to find out more about the terms of any rate offering to make sure you know all the implications that could apply to your situation.

Q. Realistically, what should our budget be?
A. Conservatively, the government has said that 35 per cent of your combined annual gross income should be enough to cover property expenses (mortgage payment, property taxes, condo fees, heating costs), and 42 per cent of your gross annual income needs to be enough to cover the property expenses plus any other credit payments (loans, credit cards, lines of credit).
In reality, every person’s situation is different, so, before you decide to take the leap into home ownership, it is a good exercise to detail your current budget to get a starting point for what supports a comfortable lifestyle. Be sure to include a savings plan into that monthly budget, not only for retirement but you will likely have maintenance costs with your new home or you may want to do some updating.
Now replace your rent payment with property costs (detailed above) and see how your monthly cash flow will be. Is it comfortable, or would you be pinched? Ultimately, it is no fun to be house rich and cash poor, so, if you would feel pinched, it might be an idea to downsize your purchase price to a more realistic level.

Q. In this economy and as a millennial, we’re told that owning a home is a very distant reality (especially due to that darned avocado toast).
Are our dreams of owning our own place just that – dreams?
A. Not at all! In my experience, millennials are very determined when they set their sights on a goal and really just need enough information to formulate a realistic plan. If a home purchase is in your future, my recommendation is to get in touch with a mortgage broker and start building that plan – sooner rather than later.
You may already be qualified and just don’t know it, or there may be tips and tricks you are unaware of that could bring that dream closer sooner. Or it may be that it could take you a year or two to get into a really strong position to enter the market. You just won’t know until you try.
I can tell you personally, it is a very satisfying professional experience when I work with clients from dream to reality, not matter how long it takes. It’s an exciting experience every time!

– Jeremy Deutsch

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

The Downsizing Dilemma

With almost 50% of homeowners ready to retire and wishing to stay in their home and 30% of those people with most of their money tied up in home equity, the downsizing dilemma is real. Can they afford to stay in their home or is downsizing the better option.

In the past, retired couples or a widow would keep their clear title home and use pension and investment income to live. They would only sell the family home and move into a retirement home when health issues forced the move or upon death of both people. Times have changed.

People are living longer and want to stay in their home. The cost of living has risen and, due to higher home values, the amount of equity in that home is greater than ever. Many home owners are being stretched with their budget and their retirement income is insufficient to maintain their lifestyle.

We have found that many retired people are unable to meet their budget each month and are using a line of credit and/or credit cards. This becomes a vicious cycle and the cost of interest pushes them to the wall and they reach their maximum limits. Then they are forced to sell their home or reduce their lifestyle to manage. Often family members are unaware till it becomes a serious matter. Planning ahead is essential to avoid this situation and lower stress levels for all family members including the aging parent.

In a recent Globe and Mail article, Scott Hannah of the Credit Counselling Society talks about the risks.

Some homeowners now recognize the need to look to their home as a source of income from home equity financing.

There are a growing number of programs designed specifically for homeowners over the age of 55. Each comes with different requirements, advantages and benefits. It is important for retiring or retired people to talk with their family and then in a group with their independent Dominion Lending Centres mortgage broker and financial planner.

For some family members, the next step is for the aging parent to downsize to a new home. For some, it is to stay in the family home and set up an equity plan to maintain a safe place and comfortable lifestyle. Consideration must be made for current income, current budget and future needs.

–  by Pauline Tonkin

Fixed-rate mortgage: What lenders you should do it with and why

25-year amortization or 30 years? Insured or Uninsured? With an A Lender or B Lender? These are just a few of the questions people have to decide on when they are pursuing a mortgage. But the biggest question of all: Fixed Rate or Variable Rate?

With the instability of the market, and the Bank of Canada’s continuous rate hikes, many people now are flocking towards a fixed rate mortgage over a variable rate. What this means is that they are choosing to essentially “lock in” at a rate for the term of their mortgage (5 years, 10 years, 1 year…you name it). Now there are benefits to this…but there are also disadvantages too.

For example, did you know that 60% of people will break their mortgage by 36 months into a 5 year term? Whether it’s due to career changes, deciding to have kids, wanting to refinance, or another reason entirely, 60% of mortgage holders will break it.

And just like any other contract out there, if you break it, there is a penalty associated with it. However, there is a way to avoid paying more than is necessary. This applies directly to a fixed rate mortgage and we can help you decide what lenders you should go with.

If you have a FIXED RATE MORTGAGE:
There are two ways your penalty will be calculated.

Method #1. If you are funded by one of the Big 6 Banks (ex. Scotia, TD, etc.) or some Credit Unions, your penalty will be based on the bank of Canada Posted Rate (Posted Rate Method) To give you an example:

With this method, the Bank of Canada 5 year posted rate is used to calculate the penalty. 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: 5.59%
Bank Discount given: 2% (estimated amount given*)
Contract Rate: 3.59%

Exiting at the 2-year mark leaves 3 years left. For a 3-year term, the lenders posted rate. 3 year posted rate=3.69% less your discount of 2% gives you 1.44%. From there, the interest rate differential is calculated.

Contract Rate: 3.59%
LESS 3-year term rate MINUS discount given: 1.69%
IRD Difference = 1.9%
MULTIPLE that by 3 years (term remaining)
5.07% of your mortgage balance remaining. = 5.7%

For that mortgage $300,000 mortgage, that gives a penalty of $17,100. YIKES!

Now let’s look at the other method (one used by most monoline lenders)

Method #2:
This method uses the lender published rates, which are 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: 3.34%
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
MULTIPLY that by 3 years (term remaining)
0.90% of your mortgage balance

That would mean that you would have a penalty of $2,700 on a $300,000 mortgage.

That’s a HUGE difference in numbers, just by choosing to go with a different lender! Knowing what you know about fixed rate mortgages now, let a Dominion Lending Centres Mortgage Broker help you make the RIGHT choice for your lender. We are here to help and guide you through the mortgage process from pre-approval onward!

– by Geoff Lee

What should come first, the house or the car?

So you just got a shiny new car, and now you want a shiny new home to go with it. Will that new car payment affect your mortgage pre- approval? The short answer… absolutely it will.
Recently, I have encountered many people looking to pre-approve for a home purchase that do not qualify. While it may be in part because of the mortgage “Stress Test” rules, a good portion is due to large debt obligations such as car loans. I have witnessed applicants that have brand new car loans/leases with huge payments and not one gave thought as to whether it would affect their ability to qualify for a mortgage.
Unless you have already done your home work with your mortgage broker by getting a mortgage pre-approval that factors the new car payment into it and your budget, you may be in for disappointment.
However, it doesn’t necessarily have to be one or the other. Here are some tips to get set for mortgage approval success.

1. Get pre-approved. Seek the guidance of your mortgage broker to know exactly what you qualify for before you start the house hunting process. Knowing what your maximum purchase price is, helps you and your realtor.
2. Be realistic with what you can afford. Start by looking at what you pay in rent now. That’s a good starting place to figure out what you can pay on a mortgage. However, you also must consider what you can get approved for.
3. Remember to save and budget for more than the mortgage payment. When you own a home, your monthly payment consists of more than just the mortgage payment. You will also pay property taxes, home owner insurance, and utilities on top of your other monthly debt obligations. Having emergency savings can help alleviate the stress of taking on the financial responsibility of a owning a home.
4. Clean up your credit. Paying off credit balances can not only help improve your credit score, it can also increase your buying power.
5. Avoid making big financial changes. This is the big one. Most lenders want to see that you’re a stable applicant. Doing things like buying a new car before you buy a new house does not establish you as stable. Similarly, opening new credit cards, or making a drastic change to your employment can also be detrimental to getting approved for a mortgage.

When in doubt always seek the advice of your Dominion Lending Centres mortgage professional.

– by Lynn Nequest

Cash Back and Decorating Allowances on New Build or Pre-sale Purchases

As the market shifts, developers will increase their incentives to buyers with cash back and decorating allowances on new build or pre-sale purchases. It is very important to review those options with your real estate agent representative and vital to consult with your Dominion Lending Centres mortgage broker. Although these offers may seem attractive, they can impact your financing and could cost you thousands of dollars.

Before you write a contract on a new build or pre-sale, ensure you have set up your team including a real estate agent and mortgage broker. Always consult with them to ensure you have sound advice. Do not rely solely on the developer’s sales representative.

What happens when you sign a contract on a pre-sale?

When you visit the sales centre for the pre-sale and decide to write a contract you have a rescission period where you can back out of the purchase. The contract you sign is drafted by the sales centre and once you remove any conditions, you are locked into the purchase. Therefore it is essential you have your real estate agent with you at the time of signing or at a minimum, they review the contract. It is in your best interest you fully understand the terms, the disclosure statement, what you are buying, schedule to build, GST, deposit schedule and any incentives.

Once you remove any conditions, the deposit is paid to the developer and a schedule set for all other deposits till the building is complete. Those total deposits are typically 20% of the purchase price. That is money you will not receive back if for any reason you are unable to proceed with the purchase. Some contracts allow assignment to another buyer, but those must be approved by the developer and may come with restrictions. Your realtor can guide you on these matters.

How Will Cash Back or Decorating Allowances Impact Your Purchase?

When the market slows, developers will use incentives such as cash back and decorating allowances on new build or pre-sale purchases as a strategy to increase sales. Regardless if this is a cash back or a rebate for decorating, it will have an impact on the purchase price for the lender on the financing. This is a common misconception among buyers and even realtors who do not understand the process from a financing perspective.

For example: A purchase price plus GST is $800,000. The developer is offering a $20,000 decorating allowance. The lender will automatically deduct the $20,000 from the purchase price. Your new purchase price will be $780,000 for financing purposes. This does not change the actual purchase price. You still have to pay the developer $800,000 for the home. The lender will lend on the $780,000 only. Therefore you must pay in cash at the time of funding the $20,000 difference.

The developer has sold you the idea you are receiving decorating upgrades of $20,000. You are receiving the value of that allowance BUT make no mistake you are paying for it.

If the incentive is a cash back amount in the above example, you will receive the cash back from the developer at the time of completion. However, the lender will still only offer financing on the lower value minus the cash back amount.

– by Pauline Tonkin

Mortgage Insurance 101

For a first-time home buyer, the types of insurance surrounding a mortgage can be confusing, so it’s important to know what insurance covers what.

There are 3 main types of insurance to know about when buying a home.

Mortgage Default Insurance – If you put less than 20% down on a home you are buying, Government rules are you must pay for Mortgage Default Insurance which covers the lender should you default on your mortgage payments.

There are three mortgage default insurers in Canada – Canadian Mortgage & Housing Corp. (CMHC), Genworth or Canada Guaranty) The purchase of this insurance solely benefits the bank/lender.

Mortgage Insurance and/or Life Insurance

You’ve just made the biggest purchase of your life: a new home for you and your family.
• What’s the best way to protect your investment if you die?

Insurance is the answer. But what kind: mortgage insurance or life insurance?

There are important differences between the two that we’ll examine.

Please note: Mortgage/Life Insurance is not mandatory to qualify for a mortgage.

You have made the biggest purchase of your life… how do you protect yourself and your family? Many people say they have life insurance through their work, but is it enough?
• The question you should be asking is – do you currently have enough life insurance in place right now, equal to your mortgage amount?

Top Benefits of purchasing Mortgage/Life Insurance

1. Peace of Mind – creates a sense of security that your loved ones will be taken care of if you pass on.
2. Mortgage Can be Paid Off – whereby any other policies that are held will be able to assist with other needs.
3. Family can Stay in their Home – if there is the unfortunate life event that is the death of the Mortgage/Life Insurance policy holder, the mortgage can be paid off which will allow the family to stay in their home and not become displaced, causing additional anguish.
4. The Younger you are, the Less Expensive – Which means that insurance is extremely affordable for a young, and likely, first time home buyer.
5. Good Health = Coverage for Unexpected Illness Later on – After illness strikes, it is more difficult to acquire life insurance.

Mortgage/Life Insurance is an option that anyone with a mortgage should consider. Ask me about a referral for reputable and credible insurance.

While we’re discussing insurance, there are other types of insurance you need to consider as well…
• Fire insurance – most lenders will want to see that you have fire insurance in place, prior to funding your mortgage to “protect” their investment.

Additional insurance options:
• Disability insurance
• Personal content insurance

Mortgages are complicated… BUT they don’t have to be! You need to protect your investment by engaging an expert.

Contact a Dominion Lending Centres mortgage professional to discuss a mortgage that works for you (not the bank)!

– by Kelly Hudson