31 May

The Big Short – Not a Canadian Story

General

Posted by: Brad Lockey

The Big Short – Not a Canadian Story

The Big Short – An American film about American finance.

Many Canadians, particularly those in Vancouver and Toronto where real estate is spoken of like a sport, will gravitate to the film The Big Short over the coming weeks. It is an adaptation of an excellent book written in 2010 by Michael Lewis. As a Canadian Mortgage Broker who read the book when it came out to better understand the differences between the two countries’ mortgage markets, I was into a theatre within the first few days of its release.

Short version:

Ryan Gosling is the only significant Canadian content in this film.

Long Version:

This is an American tale about an American debacle that takes place due to American finance policies. A tale, a debacle, and policies vastly different from anything we have happening in Canada. As with most things Canadian, our finance system is in fact far more conservative and quite sedate. It is as solidly built, resilient, and popular as Mr. Gosling himself.

Five key differences between the US and Canadian housing markets

One.

In the USA in 2006 ‘subprime’ mortgages accounted for more than one in three new mortgage applications. Over half required little to no documentation of income at all, and little to no down payment. In the movie there is a case, likely not far from reality, of a property financed in the name of a man’s dog. A system so lax that even your pet could qualify for a mortgage.

In Canada, even in 2006, subprime loans accounted for less than 1 in 20 applications, still fewer today. Even in cases of limited documentation, the Canadian system typically required 35% down payment. Equity = security.

Two.

The US system had Mortgage Brokers packaging up loans with little to no oversight or review on a Friday, and selling them the following Monday to an investor on Wall Street who was in turn re-selling the debt to yet another investor in another country. All the while, credit rating agencies focused on maintaining their initial (heavily biased) ratings of mortgage bonds, even as the mortgages inside the bonds were sliding into default, because if they did not maintain the ratings then ‘some other ratings agency’ down the block would get paid to assign a stable rating. It was (and remains) a system designed to offload risk as if all the players involved are playing a protracted game of musical chairs. They all know the music might stop at some point, but are willfully blind to it.

And hey, last time the music stopped the people turning a blind eye got little more than a slap on the wrist, and most kept their jobs and were paid their annual bonuses anyways.

In Canada, the lender, often a Credit Union or Chartered Bank, has rigorous approval standards that leave most applicants’ heads spinning, with some wondering if a hair sample will also be required. Mortgage Brokers in Canada are licensed and regulated. More important still, few Canadian mortgage applicants ever pay any kind of fees or higher-than-market rates. Nor have I had any clients simply sign documents without spending the time to understand exactly what they are signing on for.

Three.

The US system created A.R.M.’s, an unbelievably good deal on paper… at first. Recall the subprime mortgages from point 1 above. Well, about 90% of those mortgages (the ones written for people with no income) were written as A.R.M.’s.

Mr. & Mrs. American, please sign here for your A.R.M.

What’s an A.R.M.?

This was a question that millions seemed either not to ask, or did not dwell long on the answer to.

A.R.M. = Adjustable Rate Mortgage:

The pitch in 2004: “Today and today only, we can give you a 1.00% rate with interest-only payments for the first three years (Yes it gets better still: interest-only payments). That’s right, your payments will be just $415.80 per month on a $500,000 mortgage. In three years the interest rate will reset (keyword there: reset) to 4% over a 30-year amortization, but no need to worry about that as we will just refinance you at that time or flip out of the house since it will be worth so much more; just look how much it has risen in price since I started speaking a few minutes ago…”

“What’s that? How much is the payment at 4%? Why, you’re the first one to ask me that in months. I am not even sure. Let me figure it out ”(Leaves to find office manager, who in turn finds a guy that was in the business a few years earlier when math was still important. Returns.) – “It would be $2,377.59 per month. Yes, that is much higher, but hey it’s only $415.80 for now, and three years is an awful long ways away”.

In Canada it is rare to see a ‘teaser rate’ mortgage as we call them, as the optics are not great around such products since 2007. However, when you do see a mortgage product such as this in Canada, the qualifying rate used is not the artificially low teaser rate as with the US system, it is the higher (inevitable) interest rate that is used to ensure that the borrowers will have stability.

In Canada we have variable-rate mortgages which are significantly different products and again use a qualifying rate much higher than the effective rate. At the time of this writing a variable rate mortgage is at a net rate of 2.20%, but the qualifying rate used is 4.64%. In other words, the Canadian system goes the opposite path of the US system. We ensure an applicant is well overqualified for the mortgage they are applying for.

Four.

Many US residential home builders are publicly traded companies, and as another by-product of the bubbly finance system at the time, vast sums of money were thrown at them to build, build, build, and build. In 2004 it was estimated that 40% of US real estate purchases were investment or vacation homes.

In 2006 there were already vast numbers of partially constructed homes that were no longer selling, there were no buyers for them. The overbuilding was significant, and as the economy slowed it was one more layer on a rapidly rolling snowball that became an avalanche.

Meanwhile in Canada… more than 90% of real estate purchases are for owner-occupied properties, with less than 4% of mortgages being written for investment properties. Supply in most markets remains tight. Markets like the city of Vancouver, have seen the last single-family home site created. In fact, single-family homes are dwindling in many urban centres as consolidations occur to create new multi-family sites. With geographical constraints such as mountains, coastlines, borders and agricultural lands among the myriad of limitations to growth (a.k.a. ‘sprawl’), the supply side of the equation in cities like Toronto and Vancouver will not be easily remedied anytime soon.

Five.

Mortgages in many states are ‘non-recourse’ loans, meaning that the lender cannot go after the borrower for any monies owed over and above the final sale price of the asset pledged. In states such as California and Arizona, this led to many ‘strategic defaults’ by borrowers. Essentially these were an exit plan for home owners with otherwise good credit and stable incomes who found themselves saddled with a mortgage balance more than double the market value of the home. Looking at how long it would take to pay the debt, and whether the home would ever recover its value, many people chose to throw the keys to their homes — or at least their second, third and fourth homes — on the desk of the bank and walk away.

This played a role in foreclosures rising to 14.4% of all mortgages in the USA by September 2009.

Meanwhile in Canada, all mortgages are full recourse, which means that the lender can (and will) chase the homeowner to the ends of the earth for repayment of any loss, garnisheeing wages if need be to collect monies owed.

In 2009 Canada also hit a record high foreclosure level… of 0.41%. This is just slightly above the twenty year average.

Conclusion

As the movie ends it is a scene of massive government bailouts, another thing that no Canadian bank required through that period of time (in fact Canadian Banks were the only lenders in the G7 that did NOT require Government assistance). It was also a scene, unchanged to this day, of little fault being found with those who built a system doomed to failure. There were no jail sentences for those involved in perpetrating what became a massive global economic meltdown. It was as if this were something that just happened on its own. A force of nature.

In the USA there was clear evidence of fraud at all levels in a broken system that rewarded multiple layers and players to look the other way and ‘go along to get along’.

In Canada we are conservative by nature. As a Mortgage Broker myself, I am on the front lines dealing daily with fiscally prudent clients who opt to borrow, in most cases, significantly less than they (painstakingly) qualify for. I then get on the phone to fiscally prudent underwriters at fiscally prudent lenders and work through a hurricane of paperwork for an approval.

Also, I have not met a Canadian Mortgage Broker with a lounge sized fully stocked bar in their offices serving Caesars at noon as if work is just one big party (see the movie). Alas, we are a far more boring bunch here with actual work in our workdays.

As much as many would like to draw comparisons to the Canadian and USA real estate markets, there are few commonalities to be found that are any more logical than the following theory:

Ryan Gosling starred in a film about the US mortgage meltdown, Ryan Gosling is Canadian, Ryan Gosling is mortgage meltdown, mortgage meltdown is Canadian’…um ya – Illuminati confirmed!

Great flick though, an excellent adaptation of a great authors work.

Dustan Woodhouse

Dominion Lending Centres – Accredited Mortgage Professional
Dustan is part of DLC Canadian Mortgage Experts based in Coquitlam, BC.

25 May

Life Happens, Let Your Home Help

General

Posted by: Brad Lockey

Life Happens, Let Your Home Help

Sometimes “life happens”, and when it does, your home can be your savior if you have accrued some equity in it. Maybe you’ve been out of work, run up your credit cards and driven your credit rating into the ground. Perhaps, you’ve decided to leave the job you hate and venture out into the world of owning your own business. Whatever it may be, the equity in your home can help.

I recently helped a client who had maxed out her high interest credit cards due to not being able to work for a couple of years, and the credit card debt had lowered her credit score substantially. She was now back to work as a self employed consultant earning a good income, but the $1,000 monthly interest payments she was paying was seriously eating at her cash flow and not reducing the principal she owed. Dead money!!

Luckily for her, she had great equity in her condo, so I was able to provide her with an Equity Take Out Mortgage. The mortgage lender I chose was able to loan her money based on the strength of her property and the low loan to value of the mortgage based on her equity, NOT her income or credit score.

Here are the numbers:

Mortgage Amount $75,000

Rate: 4.75% (due to low credit score and equity take out)

Monthly Payments: $425.59

Savings per month: $574.41

In this case, my client was able to pay off her credit card debt and had a fair amount of money left over to invest in her business and her future.

In the end, she was very happy to be able to get her finances and business back on track, and start her life anew!

By working with me, a licensed mortgage broker who has access to a variety of lenders and products, we were easily able to find a great solution to a “life happens” scenario.

If you would like to learn more about how the equity in your home can help you, contact your nearest Dominion Lending Centres mortgage professional.

24 May

Creating a Pension Plan

General

Posted by: Brad Lockey

Creating A Pension Plan

What’s a pension? I don’t have one. In today’s day in age there are not many people that will have one when they retire. So it’s up to us, as individuals, to create our own – build your net worth from within. There are many ways to create a pension plan, acquiring rental properties is just one of them. Many of the wealthy people these days have utilized real estate to grow their empire, whether it’s through buying and selling or buying and never selling. When acquiring a portfolio of properties one is able to plan for continual growth by utilizing the potential cash flow and accrued equity to purchase a second, third, fourth…property.

First step is to determine your budget, which may ultimately be decided by how much of a down payment you have as well as to figure out what your monthly comfort level is for cash flow. For all intents and purposes I will be using values and amounts from my local area on a relatively new 1 bedroom/1 bathroom condo. With newer units comes less risk of future assessments. Do your homework*.

Purchase Price: $225,000
Down Payment: $45,000 (20% minimum, lender may request more)
Mortgage Amount: $180,000
Mortgage Insurance: $0 (lender may require depending on how income is reported)
Total Loan: $180,000

Variable at 2.40% (P-0.30%) 5 year term CLOSED 30 year amortization
Monthly Mtg Payment: $700.79
Est. Monthly Strata: $200
Est. Monthly Property Tax: $100 ($1,200/year)

TOTAL Monthly Payment: $1,000.79

Property Transfer Tax:

$2,500 (paid at completion, cannot be rolled into the mortgaged. It is calculated based on 1% of the 1st $200,000 and 2% on the remaining balance.) To calculate Property Transfer Tax http://www.bcrealestatelawyers.com/ptt-calculator/

Appraisal:

$300 (required to validate the purchase price because there is no mortgage insurer involved; CMHC, Genworth or Canada Guaranty).

Home Inspection:

$400 (highly recommended)

Title Insurance:

$200 (In short, title insurance is an assurance as to the state of title of a given property. In practical terms, it protects lenders and purchasers against loss or damage suffered due to survey problems, defects in title and other matters relating to title as specified in the policy.

Approx lawyer fees:

$1,500

The cost to acquire the property was $4,900.

Well that was easy, you just purchased a rental property…NOPE, you are just getting started. The obvious goal is to pay off the mortgage with the rent ($1,200/month) coming in.

Yearly Cash Flow
= Rent – Mortgage Payment – Property Tax – Heat – Strata – Renters Insurance** – 3% Vacancy
= $14,400 – $8,409.48 – $1,200 – $1,200 – $2,400 – $500 – $432
= $258.52

Positive cash flow is ultimately what you are seeking with a rental property, however this is not always attainable from the start. Just because there is positive cash flow at the beginning DOESN’T mean that you should start paying yourself (a pension), and that amount of $258.52 is yearly. So more or less this property just breaks even.

Because the real estate market is cyclical we are going to estimate the increase in market value by a modest 3%, year over year, some years more than others. Along with calculating the year over year market value increase we will look at how the mortgage balance has decreased over time. Remember the purchase price was $225,000 and the starting mortgage amount was $180,000.

  Market Value Mortgage Balance Potential Equity
End of Year 1 $231,750 $175,844 $55,906
End of Year 2 $238,702 $171,588 $67,114
End of Year 3 $245,863 $167,227 $78,636
End of Year 4 $253,238 $162,764 $90,474
End of Year 5 $260,835 $158,191 $102,644

If you would like more information, please contact your local Dominion Lending Centres mortgage professional.

Legend

*Read everything single piece of information provided by the seller and strata; AGMs, strata minutes, property disclosure statement, Form B as well as the depreciation and engineers report if available.

**Renters insurance (purchased by the property owner) has many variables to consider for the cost; detached home, condo, townhouse, location, value of personal contents, any betterment and improvements.

20 May

Use Of RRSPs For the Down Payment On a Property

General

Posted by: Brad Lockey

Use Of RRSPs For the Down Payment Of a Property

It is well known that when you are a First Time Home Buyer you can use up to $25,000 from your RRSP without paying any personal taxes. However, you will have to repay any amount withdrawn from your RRSP for down payment of a home purchase.

Who is a First Time Home Buyer?

Normally, you have to be a first-home buyer to withdraw funds from your RRSPs to buy or build a qualifying home.

You are considered a first-time home buyer if, in the four year period, you did not live in a home that you or your current spouse or common-law partner owned. This condition is particularly important because even if the house where you live is not in your name but your spouse or common law partner, you don’t qualify for this benefit.

Even if you or your spouse or common-law partner has previously owned a home, you may still be considered a first-time home buyer.

The four-year period:

Begins on January 1 of the fourth year before the year you withdraw funds; and

Ends 31 days before the date you withdraw the funds.

Example:

If you withdraw funds on March 31, 2016, the four-year period begins on January 1, 2012 and ends on February 28, 2016.

If you have a spouse or common-law partner, it is possible that only one of you is a first-time home buyer.

RRSP withdrawal conditions

* You have to be a resident of Canada at the time of the withdrawal.

* You have to receive or be considered to have received, all withdrawals in the same calendar year.

* You cannot withdraw more than $25,000.

* Only the person who is entitled to receive payments from the RRSP can withdraw funds from an RRSP. You can withdraw funds from more than one RRSP as long as you are the owner of each RRSP. Your RRSP issuer will not withhold tax on withdraw amounts of $25,000 or less.

* Normally, you will not be allowed to withdraw funds from a locked-in RRSP or a group RRSP.

* Your RRSP contributions must stay in the RRSP for at least 90 days before you can withdraw them under the HBP. If this is not the case, the contributions may not be deductible for any year.

When do you I have to repay the amount withdrawn?

Generally, you have up to 15 years to repay to your RRSP(s) the amount you withdrew from them for you down payment. However, you can repay the full amount into your RRSP at any time.

Example:

If you withdrew $15,000 from your RRSPs for the down payment of your house you will have to repay to your RRSPs $1,000 per year for the next 15 years.

For more information contact contact your Dominion Lending mortgage professional or visit:
http://www.cra-arc.gc.ca/hbp/

18 May

Increasing Home Values Allow for Refinance Potential

General

Posted by: Brad Lockey

Increasing Home Values Allow for Refinance Potential in Vancouver!

Just a few years ago, a federally imposed limit on how much equity you could access via refinancing your home was tightened to 80% of value. The requirement to maintain a minimum 20% equity in your property has made refinancing for many people difficult. Those who only put 5% or 10% down must wait years to build up to the 20% minimum as it is.

Over the last two years, I have seen many clients with more than 20% home equity yet carrying higher consumer debt load seek a refinance to access equity, pay off or consolidate all of their consumer debt. Many clients just did not have enough equity to make this possible.

Fast forward to spring 2016 and we are seeing a sellers’ market leading to bidding wars and increased home valuations. This recent surge may be of benefit to similar existing homeowners that do not wish to sell.

A refinance does not make what we owe disappear. We are looking to move debt from bad (unsecured) debt to good debt where it is secured against an appreciating asset. We are looking to wipe the slate clean and get a fresh start! Having high usage of your credit limits is likely eroding your credit score, adding needless stress to your life and costing you more over time than is necessary.

The major benefits of a refinance are roping all expenses into one low interest debt, reducing your overall monthly interest cost yet most important for families is the monthly cash flow improvement! I often recommend that some of the monthly savings be added to the mortgage prepayments to accelerate the debt reduction while keeping some cash left in pocket for lifestyle enjoyment!

Many people with fantastic jobs and incomes simply get a bit too deep into multiple lines of credit, new car payments and credit cards. It happens all too quickly where people overestimate what they can comfortably afford. The focus of debt cost unfortunately has shifted where folks are not concerned about the total debt amount or payoff schedule, the determining factor seems to have evolved to whether they can handle the monthly payment; cars, toys, vacations all start to add up.

These groups of clients had been able to make all payments, yet the debt did not seem to be reducing year over year. Their options were second mortgages, private mortgages or refinance to the 80% max and still keep a pile of monthly consumer debt repayments. Ultimately, I had recommended that a few clients opt to sell their home to pay off the entire debt load, and put 5-10% down on a newer home. This was the only way to access more of their equity to pay everything off. The average monthly savings that I have seen for these groups of clients was between $1,000 – $1,600/month!

This is a prime time to reassess your current financial situation. If you owe significant amounts on credit cards, lines of credit or other consumer debts, there may be enough headroom in your equity to allow you to refinance. Another prime reason to consider a refi would be property improvements and renovations, where you may be accessing equity yet the added debt may be directly offset by the potential increase in property value.

Ultimately, it is best to consult with a Dominion Lending Centres mortgage professional first. Let the math and numbers show you whether it makes sense to make a change. Our job is not to sell you a mortgage. We offer solutions or strategies through showing the numbers in a way that may have not occurred to you before!

13 May

Are You About To Renovate Your Home?

General

Posted by: Brad Lockey

 

This Is the Story of How My Wife and I Received $12,000 For Making Our Home More Energy Efficient.

About 4 years ago, my wife and I bought a house in North Vancouver, BC. It was built in 1959 and was in need of some updates. We gutted the basement to the studs and converted it to a 2 bedroom suite. We put in new insulation (and topped up the existing attic insulation), put in a new furnace/heat pump, got new windows/doors, installed 2 bathroom fans, and got a new hot water tank.

It wasn’t well known at the time (there was hardly any advertising for it), but both the Federal and Provincial governments were offering rebates for making your home more energy efficient. I knew this because of what I do. These are things that we were going to do anyway so why not get some free money for it? Here’s what we did and what you’d have to do in order to take advantage of any rebates:

-hire an energy advisor (around $300) to come to your home BEFORE you start any work. They’ll do an energy assessment of your home and can give you suggestions on what will help improve your energy efficiency

-get the work done

-have the energy advisor come back to your home and document all of the changes that you made (you’ll need to have all of your receipts handy). They look after submitting for your rebate(s)

-deposit your rebate cheque (it’s also tax free which is an added bonus)

In my personal example, we maxed out both the Federal and Provincial rebates which totalled $12,000 at the time and improved our energy efficiency by almost 50% which was huge. We now save (on average) over $100 per month on our energy costs. $12,000 was really nice to get (although our renovation costs were FAR more than what we got back, it’s nice to get something).

Unfortunately, the Federal program is no longer around as it was limited to a certain number of households. Most provinces have their own energy rebate programs. In B.C., you can still receive thousands of dollars in rebates.

Does it make sense to apply for a rebate if you’re looking at changing 1 window or adding 1 bathroom fan? Probably not.

Yes we did do an extensive renovation. Yes it was during the time when rebates were being offered by both governments. My point is that new rebates are always being offered (again not really advertised) and so it’s important to stay in touch with your Dominion Lending Mortgage Broker on what’s available out there. More and more of my clients are renovating the homes that they’re buying, so this is just an added benefit.

Not planning on renovating your home anytime soon? There are other things that you can do to save some money. Do you have a pink or mint green toilet that you want to replace? Many municipalities offer rebates for buying low flush toilets. You can also buy weather-stripping at your local hardware store for about $10 and put it around your doors to help prevent drafts. It’s very easy to do and makes a big difference.

You can check to see what’s available in your province by checking out:
http://www.nrcan.gc.ca/energy/products/energystar/why-buy/14136

In B.C., please check out:
http://www.fortisbc.com/Electricity/PowerSense/Homes/HomeEnergyRebateOffer/Pages/Rebate-details.aspx

When in doubt, please consult your local Dominion Lending Centres Mortgage Broker for details on what’s out there and where to find it.

In the future, I believe that 2 things will really help make homes more marketable:

-being more energy efficient (energy costs are always going up)

-having a secondary suite to help pay your mortgage (especially in high priced markets such as Vancouver)

Guest Blog Post from Joe Cutura
Dominion Lending Centres – Accredited Mortgage Professional

Joe is part of DLC Canadian Origin based in Vancouver, BC.

 

 

 

6 May

Difference Between Fixed and Variable Rates

General

Posted by: Brad Lockey

Difference Between Fixed and Variable Rates

The two most frequently asked questions I get are:

1. What are your best rates?

2. What is the difference between fixed and variable rates?

Question #1 is actually more complicated than question #2. Why? Because rates are not the only thing you should be looking at when deciding what mortgage product to contract to. Recently, a client brought us a product that had a 1.99% fixed rate for a 5 year fixed term. This was extraordinary, and we did our due diligence to see what the product was all about. We found out that the term was 5 years and the interest rate was fixed at 1.99%…..for the first 6 months. Then it went up to the posted fixed rate of 3.15% for the remainder of the term. Not nearly as stellar as it appeared. Rule of thumb: If it is too good to be true, it is too good to be true! Make sure you know what your mortgage product entails. It is in your best interest to find out all the hidden costs behind the mortgage product that you don’t see up front.

Which leads us to question #2, What is the difference between fixed and variable rates?

Fixed Rates For the bank, this is a lower risk. It is usually higher than a variable rate. It remains constant or fixed for the term of the mortgage which means that your payments remain constant for the term of the mortgage. This rate is based on typical rates that are being offered by banks at the time the client enters into the mortgage contract. It’s a lot like “gas wars”. When you see gas stations that are in close proximity lower and raise their prices based on what the gas station across the street is doing, you see that these gas stations are competing with one another. It’s the same with banks. They watch each other’s prices and react to what’s going on “across the street”.

Variable Rates This is a higher risk rate for the bank. It is harder to qualify for this rate, which means the bank allows less debt in your financial profile compared to qualifying for a fixed rate. A variable rate can change during the term of the mortgage which means your actual mortgage payment can either increase or decrease during the term of the mortgage.

A variable rate is also a higher risk for the client as rates can go up which directly affects your payment amount. The last 15 years has seen rates generally decrease and clients that have taken advantage of the variable rate have not seen an increase in mortgage payments. But that’s not to say that it can turn at any time. Historically, we are at the lowest rates that we’ve seen but no one has a crystal ball.

Variable rates are quoted as Prime minus a certain amount or Prime plus a certain amount. What does this mean? Variable rates are based on the Bank of Canada, a governing institution for all Canadian banks. The Bank of Canada sets the benchmark for interest rates, based on inflation. Generally speaking, if the economy needs to be stimulated and is in a state of deflation, interest rates along with the Canadian dollar are lower. If the economy needs to be slowed down and is in a state of inflation, interest rates are higher along with the Canadian dollar. Currently, the benchmark rate for the bank of Canada is 2.5%. But most banks have adopted 2.7% as its Prime rate, basically because 2.5% is just too low for the bank. Thus, a bank might offer you Prime minus 0.2% (2.7% – 0.2% = 2.5%). Remember, the Bank of Canada reviews its benchmark rate about 8 times a year. Depending on the state of the economy, they may raise or decrease the benchmark rate which will affect your variable rate.

An example:

You enter into a contract rate of Prime – 0.5% (effective rate 2.2%). 18 months later, there is a surge in foreign investment into the country which stimulates the economy. The Bank of Canada reviews its benchmark rate and decides to raise the benchmark rate to 3.00%. Your bank follows suit and raises its Prime rate from 2.7% to 3.00%. Your contracted rate for your mortgage is still Prime – 0.5%. But instead of 2.2% you are now paying 2.5%. Your mortgage payment will also go up to reflect the new rate.

For more information about fixed and variable rates please a mortgage professional at Dominion Lending Centres. We’d be pleased to answer any questions you have.