Canadian Government Throws Wet Blanket on Mortgage Market

On Wednesday this week the Department of Finance announced that some of the mortgage products created in the last two years including 40 year amortizations and zero down mortgages would be eliminated effective October 15, 2008. They also announced they would change some of the documentation requirements (I anticipate more strict requirements for self employed/no income qualifer mortgages) and institute a minimum beacon score requirement of 620 (they say would consider lower scores on an exception basis.

For more details on the changes check out my video below..



Tips on dealing with the changes:
If you're in the market and you want to purchase using one of the existing programs, make sure you get your mortgage application in by October 15th. If you were planning to buy a home and you think these changes will impact your ability to follow through with your plans, talk to your financial planner about the Home Buyers Plan which allows you to take funds out of an RRSP tax free after just 90 days as long as its for down payment purposes. Use your savings or look into getting an RRSP loan to get money into the RRSP. If your self employed, get your taxes filed so you can show your current with your taxes and if your credit score is on the low side, eliminate unnecessary loan inquiries and try and reduce your credit card balances. You can check your credit score by going to www.equifax.ca. There's no impact on your credit score when you check it yourself.

Should You Go with a Variable or Fixed Rate Mortgage?

I recently got into a discussion with a client about whether he should go with a fixed or variable rate mortgage and I shared with him a copy of a paper that was written by Associate Professor Moshe Milevsky at Schulich School of Business in 2001. The paper is called 'Floating Your Way to Prosperity' and you can find a copy of it and other papers written by Professor Milevsky at http://www.ifid.ca/research.htm. The study incorporated movements in rates over a 50-year period and proves that 8 or 9 times out of ten you would have won out by going short term vs. long term on your mortgage. Following is a copy of the discussion...

"Thanks for the article. At first glance, although I have not read it all yet, it looks professional and seems to support our decision to go with the variable rate. Two questions pop up in mind so far (there may be probably more as I read through the article);
1) How relevant you think is this article and its conclusions considering the fact that it was published in 2001 and today we are facing a new situation in real estate (sub prime) which has an ongoing impact (and we still don't know where and when it's going to stop) of downturn in economical stability and residential house prices?
2) He bases some of his analysis on past history. I have learned in life that especially in economics past does not equal the future. What is your view as to the predictability of past events on forecasting future trends?"

My response - "His study was based on the 50 year period up to 2001. If he did the study again to include the period from 2001 up to 2008, I think that the results would not be any different. I have had a variable rate mortgage for the last six years and while I think there was a short period of time when some people locked in to a fixed rate mortgage at around 4% (a very good fixed rate), I think that for the rest of the time you would have been better off with the variable rate. As far as the subprime crisis goes, while it has had a severe impact on the U.S. economy and definitely some impact on the Canadian economy, I think that the end is in sight. It is also important to note the Canadian mortgage and real estate situation is very different than the U.S. We have steady immigration, a relatively healthy economy and low unemployment, and of course a favourable interest rate environment keeping our real estate market healthy. I should also mention that we have far more conservative lending practises in Canada."

Mortgage Tip: Ask about your Lender’s Variable Rate Mortgage “Lock-in Privileges”

Not all variable mortgages are created equal. In the current mortgage market, the spread between fixed and variable rates is very wide. Fixed rates are around 5% while variable rates are closer to 4%. As a result, most borrowers are opting for variable rate mortgages. When trying to decide which variable rate mortgage to go with, one of the most important things you need to find out about, are your lender’s “lock in privileges”. What rate you will get, if you decide to lock in to a fixed rate mortgage in the future and will the lender guarantee that in writing?

Banks advertise their posted fixed rates which are higher than the rates you be offered if you were negotiating a new fixed rate mortgage today. Knowing that you will get the best discounted rate at the time of locking in will give you peace of mind now and could save you thousands of dollars in the long run. Call me for a run down on the differences in the “lock in privileges” among Canada’s largest lenders.

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.

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?

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.