31 Jul

Bridge Financing – Part One

General

Posted by: Brad Lockey

Short Version

Bridge financing is a tool that can allow a client to take possession of a new home prior to completing the sale of their current home.

  • One must have a firm, subject free, binding contract of sale in place for their current residence in order to start an application for Bridge financing.
  • Bridge financing is useful in many scenarios.  The most common being when the new residence must be purchased prior to the closing date of the sale of the current residence.  There are various scenarios that trigger this.
  • Perhaps the most common misunderstanding around this topic is the ease with which clients expect they can access ‘bridge financing’.  A firm sale of the current property is mandatory.
  • Bridge Financing is far less expensive than most people expect.  The real numbers never fail to surprise.  Below you will find example calculations.

Long Version

As mentioned above the primary trigger for bridge financing is a misalignment of purchase (of the new property) dates with sale (of the current residence) dates.  It is the only way to leverage the final 20% of equity in your current property to use as down payment money for the purchase of the new home.

Accessing that final 20% equity in the current residence is not possible without a firm sale (subject free) of your current residence.

I wil type that again so you can read it again:

Accessing that final 20% equity in the current residence is not possible without a firm sale (subject free) of your current residence.

Most lenders will provide bridge financing with this contract in hand to ‘bridge’ the timeline gap between the new purchase and receipt of the proceeds of sale of the current residence.

More and more clients choose to have the dates out of sync when extensive renovations are planned for the new property.  This allows them to only have to move once and also for renovations to be completed more easily for all concerned.  **always discuss with your insurance agent the special requirements around a home that is temporarily vacant.

Bridge financing rates are currently ~Prime(2.95%) +2.00% (or 4.95% as at July, 2017).  There is often an administration fee charged by the lender of  $250 to $500.
4.95% might seem high, and the idea of owning two properties might seem daunting, in fact some people may not have read this far having already ruled out the idea.  Hopefully not as here is the heart of the matter;

Mathematics;

Mr. and Mrs. X sell their home for $500,000.00 – Completing July 1st (staying put until the end of the school year is common)

Mr. and Mrs. X currently have a mortgage of $400,000.00.  As current Gov’t regulations set out that 80% of the value of the home is the maximum loan amount possible, there is no cash available via a ‘refinance’ or ‘securing a line of credit’ against the property.  The remaining 20% equity, or $100,000.00 in this example, can only be accessed via a sale completing, or sale-contract backed bridge financing.

Mr. and Mrs. X find a new home which the sellers will only accept a completion date of April 1st for. 90 days sooner than their sale completes.

How does one complete on a new home 90 days prior to selling the current residence?  Where do the down payment (& deposit) come from?

Bridge Financing

Mr. & Mrs. X speak with their Mortgage Broker who advises them of the following costs;

$100,000.00 @ 5% over 90 days results in an interest only payment of $412.39 for three months.  ***The 3rd payment being made the same day as the sale of their current residence completing.

Mr. & Mrs. X have also have to carry an additional $400,000.00 mortgage on the new property, likely an Open at 3.50% (although better options may exist).

This is an additional $1,158.25 per month in interest expense & payment.

Add in a $500.00 admin fee for a total monthly carrying cost of;

$1,737.30 per month. in order to own two homes for 90 days.

It is worth noting that most bridge financing is for a matter of weeks, not months.

At $392.66 per week (plus the admin fee) this is not typically a show stopper.

A small price to pay if this strategy allows one to lock down the home of their dreams, take possession earlier and allow extensive (potentially disrupting) renovations to be completed in their absence, avoid moving twice, avoid living with the in-laws, avoid storage fees for furniture, etc…

Any of these things may well make $392.60 per week seem like a veritable bargain.

Often there exists the ability to finance an extra few thousand dollars into the equation such that actual cash flow is not impacted either.  Essentially making the additional payments with the lenders own funds in order to remove the pressure of ‘two payments’.

If double payments were made at all on the current mortgage, there may be an option to ‘miss-a-payment’ on the current residence mortgage also.

Most people would not expect owning a second 500K home to cost as little as ~$1800.00 per month.  Factor in the extra $1,800.00 as potentially being raised as a part of the bridge financing itself and this all becomes much more manageable.

Another way of looking at this 90 day scenario is that it increased the cost of the home by 1%.  Was that increase warranted and worthwhile?  You will be the judge of the merits based on your circumstances.

Thank you.

19 Jul

Time To Be Heard Canada

General

Posted by: Brad Lockey

I met with a client recently who wanted to get a pre-approval before he sold his home. His neighbour is a very grouchy man who causes my client and his family a lot of stress. He just wanted to sell his home and move into a new one away from this situation. I had to advise that although he has good credit and a very stable job he does not qualify under the new rules. He was saddened to hear that, and is now faced with a decision of should he stay and put up with the situation or should he rent out his home and then he himself rent somewhere else. (Thank you, sir, for allowing your story to be shared)
 
What happened to cause this?
 
Late last year, the Federal government made changes to mortgage rules. This was after we had already seen many previous rule changes over the last seven years. They dramatically increased the qualification rate with the intention that people be able to handle a higher mortgage payment when rates start to rise. They were also attempting to cool the hot real estate markets in Vancouver and BC. Additionally, they changed which properties can be insured which has meant that people with more than 20% equity in their homes have fewer choices of mortgage lenders and/or higher rates. Since that time, they have also increased the mortgage default insurance premium and tightened up lending guidelines.
Here is what we need from you. If you or someone you know have been adversely affected by the mortgage rule changes we need you to speak up.

TELLYOURMP.CA is the site set up that you can easily visit and share your story. Maybe you were turned down or unable to buy a home large enough or in a safe community for your family. Maybe a job loss or divorce means you are looking to purchase on a single income. Whatever the case, please speak up. Visit this website, write a letter, call your MP.

The Federal government are understandably doing their best to keep the Canadian economy as strong as it can be, but my industry is seeing a lot of unintentional negative consequences and good Canadians in all provinces are being adversely affected.
 
It will not take you long and it goes directly to your MP. The mortgage industry and all the banks and mortgage lenders are on record giving their stories, but the government needs to hear from you – the Canadians this is touching most.
 
Tell your story and don’t spare the details. We need all of you. Whether you are a first-time home buyer, unable to refinance at best rates, cannot buy that next home you wanted, saw someone you care about be turned down from a lender due to not being able to qualify, or if you are a part of an industry adversely affected.
 
Let’s get noisy Canada!
10 Jul

RATE INCREASES AND YOUR ARM vs VRM

General

Posted by: Brad Lockey

Some of you are going to ask what is a ARM and VRM?

These two acronyms are mortgage speak for adjustable rate mortgage and variable rate mortgage. These two mortgage products are both based on the prime rate of interest, in most cases this is 2.70% at the bank. TD chose to be higher by .15% at 2.85%, so it isn’t controlled by the Bank of Canada. It is an individual financial institution policy.

With the Bank of Canada hinting strongly at moving up the interest rate, most likely by .25%, we will see an increase in the prime rate most likely to 2.95%. If you have an adjustable rate mortgage then you will see your monthly payment increase to match this new rate. So an Adjustable Rate Mortgage moves up with prime and you continue to gain ground by making your payments.

Variable rate mortgage is different. The VRM works like this: your monthly payment will stay the same but you will now be paying less to principal and more to interest. Not a good scenario if you are trying to pay down your mortgage and gain some equity. In this changing market, we suggest that you review the scenario with your lender and make sure that you are keeping up with gaining on your mortgage. The other scenario can also be that if you don’t adjust your payment that you could end up paying only interest and not be paying down the principal at all.

And remember, a Dominion Lending Centres mortgage specialist can help answer any questions you have.

7 Jul

Frequency Matters

General

Posted by: Brad Lockey

Aside from paying a regular monthly mortgage payment there are other choices you’ll be presented with when approved for a mortgage. This article will explain the differences and benefits of changing your payment schedule.

The goal is to pay down your mortgage as quickly as possible and save on interest. The longer it takes to pay down the more interest you’ll end up paying in the end. You’ll soon discover how choosing an accelerated payment is the best way to go.

Typical mortgage re-payment options:

Monthly: Your typical payment. With this option your payment will be the least amount and the mortgage will be re-paid the slowest. This may be more comfortable for some people as its only one payment a month to think about and plan for.

Bi-Weekly: Your 12 Monthly payments divided by 26. You would pay a payment every 2 weeks for a total of 26 payments per year.

Accelerated Bi-weekly: Your monthly payment divided by 2. This way you end up paying 2 extra payments a year the same as paying 13 monthly payments per annum.

Semi-Monthly: Making payments twice a month for a total of 24 payments a year. This will not help to pay your mortgage off any sooner than regular monthly payments.

Weekly: Taking your monthly payments for the year and dividing by 52 weeks. This will not pay down your mortgage any sooner.

Accelerated Weekly: Taking your monthly payment and dividing it by 4. You’ll end up paying the equivalent of 13 monthly payments in one year.

Here are some examples using a $250,000 mortgage at 2.44% over 5 year term, compounding semi-annually with a 25 year amortization.
You can see how choosing the accelerated option pays your balance down a lot faster than regular payments.

If you would like more information on how you can save on your mortgage payments, contact a mortgage professional at Dominion Lending Centres.

Payment Matters