New News is Old News

There has been a slight panic in the mortgage industry in the first week of October when the Canadian federal government announced new regulations upcoming to make it A) harder for homebuyers to buy houses and B) more expensive for foreign homeowners to sell houses.

To put these two main points into consideration, here is my very simple explanation.

A) Qualifying Rate- Will now be based on the benchmark of a five year fixed rate. Benchmark rates are generally an average of lenders qualifying rates and typically are about 1.5% higher than the best rates a lender will give you. So, if you qualify for a mortgage at 4.5%, most likely you can get the loan for 3%.

What this means - Before, some lenders were only checking to see if you qualified based on the lesser number and rewarding you the mortgage. Now, all lenders will require homebuyers to be able to pay back a mortgage as if they were paying 4.5% interest. That doesn't mean you will have to pay 4.5%, it only means if the rates went up to 4.5%, you have to prove you could pay that at the end of your five year term.

What you can do - 1- after you get your pre-approval, don't go out and find the most house you can possibly afford. I tell this to all my clients anyways but most still do that. Look for what that suits you, not your pre-approval.

2- Haggle. ie; lower your offering price. Check out your local assessment website to see what the gov't believes the house is worth. Check out similar sales. If you qualify for $250K and the house you want is $250K, offer $220K. Real estate is not set in stone. Get the right price to hedge against future interest rate hikes. Too many times I've seen panic buying because someone 'really wanted that house'. We live in an impulse buying world right now but real estate, and the hundreds of thousands you will be on the hook for is not meant for impulse or panic buying.



B) Selling your Home - When you sell your home, which for most Canadians is their principal residence, you don't have to declare that income on your tax return and pay taxes on it. Now, if your home isn't truly your principal residence, you will be paying tax on the income received from the sale.

What this means - Before, foreign owners could purchase a home in Canada, say it was their principal residence and then sell it for a tidy profit because we, as Canadians, don't really check up on what exactly is considered a principal residence. If you might recall, this became a real issue for Mike Duffy, Conservative Senator, who listed his property on Prince Edward Island as his principal residence but actually lived mostly in Ottawa.

So, the loophole here was that foreign owners could buy a house in Canada, state it as their principal residence although they may only actually be in Canada for two weeks of the year. The house could sit empty for the other fifty weeks. They could then sell that house and not have to pay any tax on the sale. While this doesn't change the specifics of foreign ownership, it makes it no longer as lucrative for 'house-flippers'.


So, that's my quick takeaway from Monday's announcement. For most of you that read this, there is no real need to panic. I think as more people start to make offers better suited to their future income it might even bring real estate down a little. Not a lot, but a little. Which in the end, is good for home buyers.

Deciphering mortgage news predictions

So it's been awhile. I had a decent lunch with a successful mortgage broker yesterday; talking about what makes for a good broker, what's new in the industry, etc. I was going to talk about what he shared with me but then this morning I read this article on the future of Canadian mortgages which predicts a tightening of the rules in November for lenders and what it means for the bottom line to consumers.

Acronyms and Your Mortgage Application

Yep.

There are 2 or 3 major factors when applying for a mortgage. For us insiders, they are given handy acronyms so it makes us sound really smart. These are;

Math.

LTV (Loan to Value) - ie. How much money are you wanting to borrow vs the actual value of the home in question. You want to buy a $1 million home and have $500,000 in cash? That's a 50% LTV. That's good. Lenders LOVE a low LTV.

However, due to reality, very few people, especially first time home-buyers have that sitting in their bank account. That's why there are two definitions of a mortgage - Conventional, in which the borrower has at least 20% of the LTV for a downpayment and High Ratio, in which the borrower has the minimum 5% to 19% of the LTV. A High Ratio mortage requires an extra insurance charge to protect the lender in case of bankruptcy. The main insurers for home mortgages in Canada are CMHC, Genworth and Canada Guaranty.

Easy come, easy go

TDS (Total Debt Servicing)  This number is tied to your income. Now income could be considered as employment or pension or 'other'. Recent media coverage of suspicious foreign-purchased luxury homes in the Lower Mainland has highlighted some borrowers as being simply 'housewives' or 'businessperson' without documentation stating exactly how they create this income. All that matters is that is foreign investment coming into Canada under the guise of real estate ownership.

But for us Canadians, you have to provide proof of how you come to have income in Canada, both presently and in the future. This income has to prove that you can afford your daily expenses such as groceries, utilities, credit card payments as well as the cost of a mortgage payment. The magic number for your TDS - Total Debt Servicing must be 40% or less. Again, the lower the score, the stronger your application.

A basic view of how your credit is scored.

CB (Credit Bureau) - This is your financial resume. It provides proof through a neutral 3rd party (either Equifax of Transunion) of your history paying off bills and loans. The copy I receive is an amalgamation of mixed numbers and words in a near indecipherable code for the average person. However, I did find this link online which I only wish was as clear and concise when reviewing a credit history. A credit score ranges between 300-900. Unlike the other two acronyms, the higher the number the better. Most lenders won't look at giving best rates to anyone under 600. But not to worry, there is a complete other side of mortgages (called the B side) which takes on higher risk clients, for higher interest rates to reflect that risk.


These 3 acronyms are the most important letters in your life when it comes to being approved for a mortgage. Everything else is just peripheral evidence gathering. Your mortgage broker can help you discuss your scores and what can be done to improve them if needed. Buying a house is not an impulse buy - the best value you can get for your money is to take a balanced, well-informed look at your present finances and then you can make a plan or path towards home ownership.

Playing the Interest Rate Chicken Game with your Term

5 Year vs. 10 Year Mortgages – Does it Matter? 

The best and worst thing about becoming a mortgage broker is the training. On one side, getting your license involves doing a lot of math with specialized calculators and an understanding of legalities and other professions surrounding purchasing real estate. The advent of the Internet has made the former redundant and while it's nice to know how a real estate appraiser uses comparable sales to determine a home's net worth, it isn't up to me to actually do the appraisal.

Your friendly mortgage broker learns a lot through osmosis and trial and error and trying again. Most of my education has come after I received my license. Understanding credit reports and lender's various positions regarding credit scores, 'high-risk' locations for lenders, purchasing your parents' house, sweat equity as a down payment, all matters not covered in the How-To-Brokerage textbook. 

Thinking about bankruptcy protection?

I first went bankrupt in the mid-90's after my first business venture failed. Five years later, my second venture also failed to see me grasp the golden ring of success. I was once again left penniless. Eight years ago, a bitter divorce, a career change, move and custody battle left me for the THIRD time in large debt to my creditors. I filed to be put in a consumer proposal. That's two hard knocks against my credit score and I'm only in my forties.  

and so the opposite is true...

So I've been there. I know what it is like to feel the strain of financial hardship, to think the good times will last and also the bad times will never end. If you are feeling any bit of the latter right now, I may be able to help.

I'm a victim of my own optimism, some bad advice and some bad choices. I get that. Your probably think that too. A few years ago, I made another career choice and that was to become a mortgage broker. I learned that if you have a house there are options out there which can help you avoid bankruptcy or discussing the benefits of a consumer proposal. I wish I knew what I know now eight years ago.

Explore all your options first. If you own a house, see if you can use the equity in that to lessen your debt. Can you rent a room to reduce debt? What about renegotiating your mortgage payments?

Simply, would you rather be paying 19% interest on your credit cards and/or other debts or move that balance to your mortgage and pay only 3%? Not only are you spreading your repayments out over a long period of time, your credit score will still be intact, if not slightly better.

So, contact me. Let's talk and see what I might be able to do for you.

Long Time, No Shop Talk

Hi everyone.

You may have been wondering when I was going to post another mortgage-related blog. So was I.

Truthfully, for 99% of us, mortgages aren't as exciting as say, hockey or a car accident. Maybe mortgage-related news is the equivalent of watching a dart game. Which is a great analogy.

I'm the dart thrower tosser and your mortgage application is the dart. Sure, you can definitely throw your own dart at the board - there's a good chance you will hit it. Maybe you hit a seven, maybe a 15.

Unless it's on fire. Then you should call the fire department.

Or I could step up and throw it for you. I will own that dart board. Most people aim for the bulls-eye - I'm aiming for that triple 20. But maybe due to your circumstances I have to aim at the ten or sixteen. I could also hit that three, maybe we should talk about that strategy first. But when it comes down to it, I have the knowledge and the skill to take that shot for you.