Friday, March 21, 2008

Complaining About Property Tax Like Crying with a Loaf of Bread

A lot of people were very upset when the Toronto Liberal government recently announced a proposal to increase property taxes. You may disagree, but I don't think the proposed property tax increase is a big deal. Based on the average price of a home in the city of Toronto, which is around $365,000, the proposed increase would amount to a total of $81 per year. But to be fair, when you consider all the escalating costs homeowners have been facing in recent years including the new city land transfer tax on purchases in addition to rising utility costs and taxes, together they add up. And if you're on a fixed income, keeping ahead of it all can be a challenge.

Now if you are a homeowner and have owned a home in the city of Toronto for the last ten years, let’s consider for a moment how you have benefited. House prices have increased dramatically in the past ten years -- if you bought a house in 1997 for $190,000, given an average increase of 6% per year, your house would be worth approximately $365,000 today. Last year alone you would have benefited from an increase of approximately $22,000 in the value of your house! When you look at the big picture, it makes an additional $81 a year in property taxes look like spare change. And CMHC has forecasted yet another 6% increase in house prices this year.

My grandfather once said to me, when you have something great and you complain about it, it’s like crying with a loaf of bread. And having lived through the great depression, he knew that if he had nothing else but could still afford to buy a loaf of bread for dinner, then you still had something. Let’s not forget how fortunate we are to live in a city like Toronto (in Canada actually). Because of the high demand for real estate, homeowners have benefited from considerable increases in the value of their homes and in their net worth in recent years.

So how do you convert equity into cash you can use to pay bills? You borrow against the equity you have in your home. One method is to get a line of credit. Usually the rate charged on a secured line of credit is at Prime. Prime rate is currently 5.25% and with downward pressure on rates as a result of the subprime mortgage crisis in the U.S., rates are expected to go down.

If you’re reluctant to borrow, you could also consider downsizing your home. For some, that may be a good solution, especially if you're an empty nester and you have more house than you need. You'll probably enjoy lower property taxes and utility costs on a smaller home too, but selling costs are high. You’ll have to pay real estate commissions and legal fees on the sale of your home, as well as land taxes and legal fees on the purchase. After expenses, if you move from a $400,000 home to a $300,000 in the city of Toronto, you'll end up saving around $70,000. Approximately $30,000 will go up in smoke. Moving expenses can take a large bite out of your equity.

If you want to stay in your home because you’re comfortable there, and if you’re over the age of 60, you may qualify for a reverse mortgage. The dominant player in the reverse mortgage market in Canada is CHIP -- that stands for Canadian Home Income Plan. CHIP has been around for 20-years. Their borrowing rates are around 2% higher than the current prime rate, but the benefit of the reverse mortgage is that you never need to make a payment and they won't ever force the sale of your home as long as you’re living in it. I recently had a conversation with Greg Bandler, an SVP at CHIP. CHIP takes a holistic approach to addressing the needs of their clients by leveraging their network of financial planners and by looking at your whole financial picture.

Saturday, March 15, 2008

How to Lose a Deal in Ten Days

Losing is never easy. And just because you lose, as you will some of the time, it doesn't mean you're a loser. So when you know you're going to lose, do it like a winner. People aren’t out to get you. They just do what they think is in their best interest and they aren’t thinking about how they can 'get' you. So don’t take it personally. The trick is to learn whatever you can and move on.

I recently had a client who after speaking with several different mortgage specialists, decided to use my services. Yeah, victory! Not so fast. This is the beginning of the story and like all good stories, this one has lots of twists and turns.

The mortgage application was unique because the borrower just moved to Canada and worked for a company that was also new to Canada. I applied at a major bank that was known to offer a lending program suited to the borrower. Since the company was also new to Canada, the bank was giving us a difficult time with the application. The applicant was more than patient, working with us over a period of two weeks, providing the additional documentation the bank requested to help get the loan approved.

One of the other mortgage specialists the borrower had been in touch with worked at a branch at the same bank that I applied to. He did a good job, staying in touch with the borrower the whole time. He told the borrower he could easily get the approval that we were working so hard to get. Seems strange he was so confident he could get the approval we were having such a difficult time getting, at the same bank!

After much effort, we finally got the word, our application was approved! Now we just needed to get a written commitment from the bank and get the borrower signed up. The deal was closing in just a few days and we didn’t have a lot of time -- by now the applicant was really on edge. The lender promised to have the paperwork to us the next day by noon but they did not deliver. The borrower finally lost his patience and called the mortgage specialist at the branch. I finally got a written commitment that afternoon at around 4 PM but by that time the borrower had already met with the mortgage specialist at the branch where they produced a written commitment before we did.

The borrower called me the next day and explained that he wanted to go with the mortgage offered to him by the branch because even though my mortgage was from the same bank, he felt that the branch did a better job getting him the mortgage than we did. My channel was slow and even once we had the approval we failed to deliver the paperwork at the promised time. He wanted to continue dealing with the branch. Here’s the rub.

He was also being told by his branch that due to internal politics, his branch would not be able to fulfill the mortgage, unless I cancelled my mortgage application with the bank first. Since we applied for the mortgage first, according to the bank’s policy, the branch was not allowed to offer him the mortgage. Later that day I sent an e-mail to the bank, cancelling my mortgage application. (I added a few comments about why the application was being cancelled and how the poor service they provided was the reason for it, but that's another story.)

Some people would argue that I should not have cancelled my mortgage application and would have then won the business by default. I disagree. If someone doesn't want to do business with you, you cannot force them. In the end, the applicant was pleased with the way I handled things, despite the fact that I did not fulfill the mortgage for him. As a result, he referred me to several other clients and gave a positive report back to the person who originally referred him to me.

What would you have done in this case?

Tuesday, March 4, 2008

Why Mortgage Lenders Care About Where Your Down Payment Comes From

When people are applying with me for a mortgage and I ask them where their down payment is coming from, they often give me a confused look. They don’t understand why their lender would care where their down payment comes from. After all, a down payment is a down payment. Who cares where it comes from? Actually, it matters a great deal where your down payment comes from.

The source of your down payment says a lot about the strength of your mortgage application. For example, if you have been able to save $50,000 for a down payment, it says something about how you handle money. All else being equal, a mortgage application with a down payment that comes from your savings is stronger than an application with a down payment that is a gift from a family member.

Lending institutions like banks and trust companies will ask to see proof of your down payment. If your down payment is from your savings, you will need to provide either 3-months bank statements or copies of investment certificates. If the down payment is a gift from a family member, a gift letter will need to be provided with the donors contact information.

In some cases it is a requirement of the mortgage that the down payment be from the borrowers own resources. For example, there is a mortgage product available for self employed people in Canada where proof of income is not a required, but it is a condition of the mortgage that the down payment – which must be at least 5% of the purchase price – come from the borrowers own resources. I guess they figure that if they are going to loan you that much money without proof of income, you should at least be able to show that you’ve been able to save the down payment!

Sometimes, people want to borrow their down payment. Why would anyone want to borrow funds for a down payment? The main reason is to avoid insurance premiums. In Canada, when your down payment is less than 20% of the purchase price, you must pay mortgage insurance premiums. Mortgage insurance premiums normally range between 1% - 3.1% of the mortgage amount. By increasing your down payment, you can reduce or avoid the insurance premium.

The disadvantage of borrowing funds for a down payment is that your ongoing monthly cost to service all your debts may become onerous. On a line of credit most institutions require 3% of the outstanding balance to be repaid monthly. It’s usually not worth borrowing your down payment but there are exceptions. I recently prequalified a buyer who had an unsecured credit line at prime. By drawing $50,000 on her line of credit she would save approximately $10,000 in insurance premiums. Since the rate on the credit line was attractive and since the line of credit payments were interest only in her case it made sense.

Condo Financing 101: Financing for Condo Buyers

There are many reasons people buy condos. For some, it’s a lifestyle decision. When living in a condo you are not directly responsible for the upkeep of the property. No more snow shovelling or grass cutting! You still pay for these services, but the cost is shared among all the condo owners. For others, especially if living in the city is an important factor in your decision about choosing where to live, a high-rise condo is a more affordable way to purchase a home.

Mortgage lenders consider income a major factor in deciding how much mortgage they will approve you for. If, based on your income, you don’t qualify for a mortgage big enough to buy a single family home and you don’t need all the space you get with a single family home, you might qualify for the mortgage you need to buy a high-rise condo.

One of the things that frequently confuses people who buy new condos is that they usually do not take title to the unit when taking occupancy. The occupancy date -- some builders call it an ‘interim’ closing date, just to add to the confusion -- is frequently mistaken for the closing date. The purchaser does not take title to the unit until the condo is registered with the municipality and that usually doesn’t happen until at least ninety percent of the building is occupied. The occupancy period can be as long as a year – and until the condo is registered, you must pay an occupancy fee while living in the unit. Your mortgage lender does not advance funds and you don’t have to start paying your mortgage until you take title to your unit.

Another thing that some people are surprised to learn is that the total of the deposits you give to the builder from the time of purchase up to the closing date do not have to equal the down payment you finally make on your purchase. On average, builders will collect 20%-25% of the price of the condo in deposits on your unit between the time of purchase and the closing date. When your unit is ready to close, you can get a mortgage with as little as zero down. People are often relieved to hear that they can get money back on closing, especially if they find themselves short on funds.

If you opt for a down payment of less than 20% of the purchase price, keep in mind that the mortgage will have to be insured and you will have to pay high ratio mortgage insurance premiums. In Canada, high ratio mortgages must be insured by CMHC, Genworth or AIG. It makes no difference which insurance company your lender uses; the insurance fees are the same with each insurer. The premium is determined by the percentage down payment you make on your purchase and the length of the amortization you choose.

To give you an idea of how much insurance costs, let’s say you bought a $300,000 condo with a ten percent down payment. On a mortgage of $270,000, the insurance premium would be $5,400 (2% of the mortgage amount on a 25-year amortization). The insurance premiums can be paid up front but most people opt to have them added to the mortgage. PST on the insurance premium must be paid at the time of closing. You can find a complete schedule of premiums on Genworth’s website at or contact your lender for more information.

Most builders have a representative from a bank on site that can pre-approve you for a mortgage and offer a guaranteed mortgage rate at the time of making your purchase, which will be held for you up until the closing date. It is possible that your ‘rate hold’ expires prior to closing if the project is delayed. It’s wise to get a rate hold in place at the time of purchasing your unit because it costs nothing to do so. If rates go down before the closing you can negotiate a lower rate. If they go up, at least you are protected. It’s a good idea to start shopping around for a mortgage at least three months prior to the final closing, to make sure you are getting the best deal. You want to make sure you’re getting the right mortgage for your needs.

Today, many people are opting for variable rate mortgages because variable rates are approximately a half a percentage point lower than fixed rates and there is pressure for rates to go down further. It is expected that variable rates will go down even further when the Bank of Canada meets again in early March. With most of the variable rate mortgage products on the market, you can lock into a fixed rate later on, if rates start to rise.

When you buy a resale condo, the seller must provide you with a status certificate which should contain up to date financial statements for the condo corporation, information about any special assessments, proof of insurance and information about the unit you are purchasing. Your lawyer will have an opportunity to review this information and if s/he advises that you should not proceed with the purchase, you are not obligated to proceed.

When you purchase a property, whether or not it's a condo, it is advisable to put a financing clause in your offer which states that you have five business days to obtain satisfactory financing. By having this clause in your offer, you will be allowed to walk away if you do not obtain satisfactory mortgage financing. Even though you may have been pre-approved for a mortgage, your financing is not firm until you have purchased a property and your mortgage lender has issued a mortgage commitment for that property.