17 Jul

RISING INTEREST RATES AND THE IMPACT ON REAL ESTATE VALUES

General

Posted by: Brad Lockey

Rising Interest Rates and the Impact on Real Estate Values. Is there a direct connection? In a post entitled Interest Rates and Property Values. What’s the Connection?, I suggested that there was. An example was given which suggested that mortgage lenders would be directly impacted by a rise in rates, as their underwriting parameters, most notably debt service coverage requirements, are directly impacted. An inability for a buyer to secure the required financing amount, in an environment of increasing interest rates will, I argue, impact their willingness to offer as high a purchase price. Arguably a lower debt level will necessitate a greater amount of equity. This directly diminishes an investors cash-on-cash return. The inevitable result will be a softening of values since buyers will want to offer less.

Are there Other Factors?
The above-noted rationale, for establishing the link between interest rates and values does, however, ignore other factors which may impact market sentiment.

A recent study by Manulife Asset Management raises some interesting observations. In their March 2018 report entitled Canadian Commercial Real Estate Outlook, Manulife’s study observed that in fact there was no consistent relationship between real estate values and interest rates. One of their important findings was that although interest rates have been rising since November 2016, largely as a result of economic growth and higher inflationary pressure, capitalization rates actually declined. Why? Well apart from the sentiments of an individual buyer and lender, which is what I referenced in my earlier post, Canadian investors enjoyed improving real estate fundamentals. Yields were seen to be attractive in comparison to other investments, and there was a rise in foreign investment. All contributed to a support for commercial real estate fundamentals and stable or enhanced values.

Capitalization Rate Refresher
You may recall that capitalization rates are comprised of a nominal “risk-free” rate (often associated with a Government of Canada benchmark bond yield), plus a risk premium attributed to a specific property type or asset. If, as it appears, overall capitalization rates have declined, could it be that the “risk-free” rate is falling as well? I will encourage you to take a look at the Manulife report and come to your own conclusions. From a lender’s perspective, I do not doubt that rising rates have a bearing on what a buyer will pay for a property. I suspect real estate appraisers will be like-minded. The Manulife study, however, cautions us that there are macro-factors at play as well, and a strong economy is supportive of longer-term stability, and indeed growth, in the Canadian Commercial real estate market.

17 Jul

RATE HOLDS EXPLAINED

General

Posted by: Brad Lockey

Have you ever heard of the term rate hold?
If you have ever worked with a mortgage broker, chances are, you have!

Rate holds are something that the majority of lenders offer to potential clients purchasing a new home who need a mortgage. Rate holds are generally not given out for people refinancing their mortgage or looking to transfer it from one lender to another.

120 days is the longest rate hold available with lenders. Once you have created an application with a mortgage broker, they can submit it to an available lender offering rate holds on an interest rate you want to take advantage of- all without a property attached.

This rate hold does not commit you to working with a lender, does not commit you to working with the mortgage broker who submitted it, and does not hurt your chances of receiving an approval down the road (assuming you and your mortgage broker have not submitted multiple rate holds and plan to use a third or fourth lender).

For example, day one you submit your application to a lender for a fixed interest rate of 3.24% for 5-years, and on day 60 that interest rate moves to 3.54%, as long as your mortgage closes in the next 60 days, you are protected and can keep your 3.24% rate. If rates go down, not up, you can also take advantage of the lower interest rate.

The one caveat I like to explain is that this rate hold still means that you must qualify for the mortgage. It’s imperative that documents be collected upfront, credit is pulled and verified and the property being purchased is appetizing to the lender. Otherwise, your rate hold is worth the piece of paper it’s printed on, and nothing more.

Once the 120 days expires, there is nothing stopping you from submitting another rate hold, it will just be subject to current interest rates the day of submission. If you have any questions, contact a Dominion Lending Centres Mortgage Professional who can help.

23 Jun

IS YOUR LINE OF CREDIT KILLING YOUR MORTGAGE APPLICATION?

General

Posted by: Brad Lockey

The last round of mortgage rule changes imposed by the government regarding qualifying was that if you have a balance on your unsecured line of credit, then to qualify for a mortgage the lenders require that we use a 3% payment of the balance of the line of credit.

Simple math is,  if you owe $10,000 we have to use $300 as your monthly payment regardless of what the bank requires as a minimum. Given that the banks hand out lines of credit on a regular basis it is not uncommon for us to see $50,000 lines of credit with balances in the $40,000 range. That amount then means we have to use $1,200 a month as a payment even though the bank may require considerably less.

So what if it is a secured line of credit?
Again we have clients telling us that they don’t have a mortgage only to realize they do have a Home Equity Line of Credit (HELOC). A home equity line of credit by all definition is a loan secured by the property, the actual definition of a mortgage.

Again, it’s something the bank will require little more than interest payment on because it is secured. The calculation here can also upset the calculation for your next mortgage, as what is required by many lenders is to take the balance of the HELOC. Let’s say the balance is $200,000 and you convert it to a mortgage at the benchmark rate, which today is 5.34% with a 25-year amortization. That without any fees today is equal to $1202.22 per month, so what in the client’s mind may be a $400 or $500 dollar interest payment for the purpose of qualifying will be almost three times higher.

This one change to supposedly safeguard the Canadian consumer has lately been the thing we have seen stop more mortgages than just about anything else. If you have any question, contact a Dominion Lending Centres mortgage professional for answers.

20 Jun

THE RIGHT KIND OF DEBT

General

Posted by: Brad Lockey

Put yourself in a bank or lender’s shoes. Someone comes into your branch and asks you to politely loan them $300,000. You are a big bank, but $300,000 is still a lot of money. How do you ensure this person is going to pay back the money you loan them, on time, and in the right amount? Look at their record for borrowing other people’s money.

This is why taking on different kinds of debt when you are young is a good thing, but it must be within reason.

Credit Cards
Lenders want to see a minimum credit limit of $2,000 as well as the fact that you use your credit and pay it back on time. Don’t go overboard, even just purchasing your car’s monthly gasoline on your credit card and paying it off when your statement comes out should be enough, and the longer you do this, the better.

Car Loan
Banks love giving loans through car dealerships to first-time borrowers. Why? Because if they treat you right, guess who you are going to go to when you are ready to ask for a mortgage loan. Getting an auto loan for a reasonable amount will truly help showcase your ability to a lender. Just try and make sure any car loans are completely paid off before applying for a mortgage!

Lines of Credit
Almost like leveling up from a credit card. You will get a much bigger credit limit, and have a much lower interest rate. Plus, the minimum payments are usually, interest-only, making it easier to manage. Using this to make a bigger purchase and making monthly payments can show your ability to manage debt.

I bet you’d feel a lot more comfortable loaning someone $300,000 if they have successfully managed debt on all three of these levels, rather than someone who came to you with only a chequing account to their name. If you have any questions, a Dominion Lending Centres mortgage professional near you.

14 Jun

DON’T FORGET THE CLOSING COSTS WHEN YOU PURCHASE A HOME

General

Posted by: Brad Lockey

The purchase price you negotiate when buying or selling a home is just one part of the total cost of buying a home. In addition to the purchase price, there are several other fees – known as closing costs – all of which you need to factor into your purchase price.

Closing costs tend to be hidden costs when buying a home. It’s not a set number, but a compilation of various administrative, legal fees and other one-time expenses associated with the purchase of a home that is due on the completion date.

These costs can add up, so you’ll need to factor these costs into your cash-on-hand budget.

Many first-time home buyers underestimate the amount of cash they will need for closing costs. Typically, you’ll want to budget between 1.5% and 4% of the purchase price of a resale home to cover closing costs.

Of course, these are estimates — the actual amount you will need could be higher or lower, depending on factors like where you live, the type of home you’re buying, or if it’s a new construction (+5% GST).

To help you plan the purchase of your property, here’s a snapshot of the extra fees you can expect to pay once you’ve settled on the price of your home.
o Legal Fees
o Title Insurance
o Fire Insurance
o Adjustments
o Property Transfer Tax (PTT)
o GST
o and more…

Here’s an overview of what you can expect.

Legal Fees: Legal/Notarial Fees and Disbursements. The lawyer/notary is the person who goes through all the paperwork and makes sure that everything is legitimate and binding. They confirm that all the items that were agreed to by the buyer, seller/builder, and lender are written and worded correctly. Your legal representative should also be able to walk you through each document that you sign so that you understand what you’re agreeing to. Legal fees range from $500 to $2,500. You will also need to reimburse them for the out-of-pocket costs that they incurred while handling the various searches and registrations, including title insurance (see below), property and execution searches, and the registration of the mortgage and deed. These disbursements are repaid to the lawyer on the closing date, as well as incidentals such as couriers, certified cheques, and photocopying, the land transfer tax, the down payment, and any interest adjustments.

Title Insurance: Title refers to the legal ownership of the property. The deed is the physical legal document that transfers the title from one person(s) to another. Both the title and deed of the home must be registered with a land registrar.

Most lenders require title insurance as a condition of granting you a mortgage. Your lawyer or notary helps you purchase this.

Title insurance protects you from title fraud, identity theft and forgery, municipal work orders, zoning violations and other property defects. It can also protect you against fees and costs that were not caught in the searches your lawyer conducted prior to the sale (Yes this can happen!).

Title insurance premiums range from $150-$500 depending on the value of the property.

Fire/Home Insurance: Mortgage lenders require that you have fire/home insurance in place by the time you complete the purchase of your home.

Property insurance protects you in case of fire, windstorms or other disasters. It covers your home’s replacement value. The amount required is at least the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size and extras being insured, as well as the insurance company and the municipality. Home insurance can vary anywhere from $400 per year for condos to $2,000 for large homes.

Adjustments: An adjustment is a cost to you to pay the seller for the seller prepaying for something related to the house including property taxes, condo fees, heat etc. on your behalf.

Simply put, if you take possession in the middle of a month, the seller has already paid for the whole month and you must pay the seller back for what they’re not using. These adjustments are prorated based on the date you complete your purchase of the home. The most common adjustments are for property taxes, utility bills and condo fees that have been prepaid.

Property transfer tax (PTT) in British Columbia, is a tax charged to you by the province. First-time home buyers are exempt from this fee if they are purchasing a property under $500,000. All home buyers are exempt if they are purchasing a new property under $750,000.
• In British Columbia, the PTT is 1% on the first $200,000 of purchase, 2% over $200,000 & 3% on any value over $2,000,000.

GST is a federal value-added tax 5% on the purchase price of a new home. If someone has lived in the home, the home isn’t subject to GST.
• There is a partial GST rebate on new properties under $450,000.

Interest Adjustment Costs: Most lenders expect the first mortgage payment one month after completing the purchase of a home. If you close mid-month, please note some lenders expect the first payment, or at least the interest accrued during that time, on the 1st day of the next month. When arranging your mortgage, ask how interest is collected to the interest adjustment date.

Other closing costs:
Will your new home need furniture?
Carpets?
Lighting?
Window coverings?
Appliances?
Do you have the equipment you need to maintain the lawn and gardens?
Are you hiring movers or renting a truck?
Will you need boxes, bubble wrap and tape for the move?

While these and other out-of-pocket costs aren’t part of the real estate transaction, you still need to budget for them. Plan your expenses as much as possible. If necessary, decide what you can put off buying until later, after you move in and get settled.

If you have any questions, a Dominion Lending Centres mortgage professional can help you out.

13 Jun

WHAT ARE ACCELERATED PAYMENTS?

General

Posted by: Brad Lockey

An accelerated payment is a mortgage payment that is increased slightly so that you can pay off your mortgage faster. There are two common types of accelerated payments: bi-weekly and weekly. Of the two, bi-weekly is the much more common choice because it matches with pay dates more often.

An accelerated payment works by increasing your weekly or bi-weekly payment by an amount that would have you pay one full month’s payment extra per year.

Accelerated payments are a great way to start paying off your mortgage, but they actually do not have much of an impact on the interest you will pay. Banks and mortgage professionals use this term to make borrowers think they are paying off their mortgage faster, but the amount of interest saved over the course of your term is minuscule.

There’s nothing wrong with accelerated payments, but they are only part of the puzzle. Please contact a Dominion Lending Centres mortgage professional to learn more.

Illustration:
If your payment is $1,000 per month, you pay 12 months per year, which will equal $12,000 of payments that year.

Now, if you pay semi-monthly or every half month, you pay $500 per payment, for a total of $12,000 per year at 24 payments.

Bi-weekly payments are 26 payments per year with $461.50 per payment.

However, accelerated bi-weekly payments use the semi-monthly payments of $500, 26 times. This means that you end up paying $13,000 over the course of the year, or one extra monthly payment.

The Bare Bones

If all you do is an accelerated payment, your mortgage payoff is stunted compared to what is available. Across Canada, due to the fact that mortgage sizes are now very high, paying off a mortgage should be more of a priority.

6 Jun

LAST MINUTE CREDIT CHECK

General

Posted by: Brad Lockey

As I’ve said many times, one of the single greatest determining factors in whether you can become qualified for a mortgage and the interest rate at which you do, is your credit history. Many people, unfortunately, don’t know this and can be completely blindsided when it comes time to qualifying.

However, the truly unsettling idea about credit scores and their relation to home financing is the fact that most people do not even know they are extremely important even after you have been approved…

Once your offer on a home is accepted and you remove financing conditions, it is your obligation to secure the money needed to close the sale. There is usually a list of conditions one must meet and satisfy in order to obtain the financing they need from a lender. Once that is done, the mortgage will be sent to a real estate lawyer where they will be instructed to finalize everything. This is where all closing costs will be paid and all corresponding money will be sent to the proper parties involved.

However, before any of this is done, one more thing must happen…

Your credit report can be reviewed once again in order to verify your credit history is the same as it was when you were first qualified for a mortgage, sometimes months earlier.

So what happens if you made an offer on a home, got approved for financing, lifted all conditions, and because you also met all the lender’s conditions, went out and bought new furniture for your home on a credit card? Well, you may not be able to receive your loan anymore…

If you increase the amount of money you are borrowing through any credit card or bank, miss payments on existing debt, or for any reason alter your credit history from the day you are approved until the final closing day at the lawyer’s office, you run the risk of not being able to complete your purchase.

If you plan on spending any money that isn’t cash and isn’t in a separate account needed for your down payment or closing costs, you need to talk to your broker because it could end horribly for all parties involved and potentially result in legal disputes.

This is the most important purchase and decision you may ever make, why things like this have never been explained in schooling or anything like that is beyond me. That is why it is important to work with an experienced, knowledgeable Dominion Lending Centres mortgage broker and make sure you fully understand the process you are about to embark upon.

1 Jun

4 SIGNS YOU’RE READY FOR HOMEOWNERSHIP

General

Posted by: Brad Lockey

While most people know the main things they need to buy a home, such as stable employment and enough money for a down payment, there are a few other factors that may help you realize you’re ready, perhaps even earlier than you thought!

As a mortgage broker, it is my job to ensure that each one of my clients is getting the best service I can provide. Part of this means educating as much as possible when it comes to buying a home, which is why I’ve put together a list of 4 signs that may tell you that you are ready to become a homeowner.

You should have more funds available than the minimum of a down payment
This one may seem obvious, but it’s something that people may not realize until they actually think about it. It’s very difficult to afford a home if you only have enough money for a down payment and then find yourself scrambling for the day-to-day living after that.

If you have enough money saved up (more than the minimum needed for a down payment), you may be ready to start house-hunting.

Your credit score is good
This might seem obvious at first glance, however, if you don’t have a good credit score, chances increase that you could be declined altogether or stuck with a higher interest rate and thus end up paying higher mortgage payments. If you have a less-than-optimal credit score, working with a mortgage professional can help you get on the right track in the shortest time possible. Sometimes a few subtle changes can bump a credit score from “meh” to “yahoo” in a few short months.

Breaking the bank isn’t in your future plans
Do you plan on buying two new vehicles in the next two years? Are you thinking of starting a family? Are you considering going back to school?

Although you may think you can afford to purchase a home right now, it’s extremely important to think about one, two, and five years down the road. If you know that you aren’t planning on incurring big expenses that you need to factor into your budget anytime soon, then that’s something that may help you decide to buy a home.

You are disciplined
It’s easy to say, “it’s a home, I’m going to have it for a long time so I may as well go all-in!”. While that would be nice, that’s rarely the case!

You must have a limit that you’re willing to spend. Sitting down with a mortgage broker or real estate agent and analyzing your finances is crucial. It’s important that you know costs associated with buying a home and what the maximum amount is that you can afford without experiencing financial struggles. IMPORTANT: This is not the amount that you are told is your max!

This is the amount that you calculate as your max based on your current monthly budget and savings plan. It’s quite frequent where I have clients tell me that their max budget is, say, $1200 and then when I run the numbers they could actually be approved for much more. Low and behold suddenly these guys are looking at homes that are hundreds of dollars a month higher than their initial perceived budget. It is up to you (with my help or pleading, when necessary) to reel things back in and make sure that you aren’t getting into something that affects the long-term livelihood of a well thought out budget or savings plan.

Conclusion

These are just four signs that you may be ready to purchase a home. If you’re seriously considering buying or selling, talking with a Dominion Lending Centres mortgage broker, such as myself, can help put you on the right path to a successful real estate transaction.

30 May

MORTGAGE MOMENT: WHEN LIFE GIVES YOU LEMONS…

General

Posted by: Brad Lockey

We all do it. Even I fall guilty to it at times. It’s really a part of Human Nature…and really what fun is life without it?

What exactly are we talking about? Dreaming. We make grand plans and lay them out with the utmost care. We write them out, daydream about them, and (hopefully) we make them come true! There is nothing wrong with doing this…not a single thing! However, as many of you know, rarely do the dreams and plans we lay out stay on course as we would like them to.

This holds true many times for mortgage clients. We find that many times, what they initially come to us with when they are being pre-approved, rarely is the same less than 3 years later (There’s a reason 6 out of 10 Canadians break their 5-year term mortgage early).

Recently, we had just this happen with one of our clients.
A young, working professional couple, found themselves in a difficult situation when one of them was injured and went on long-term disability leave. Their income took a significant drop due to this and their cash flow was of course, negatively impacted. They relied (as many people do) on credit cards and at one point also took out a line of credit. They were able to make minimum payments each month on their loans and debts, but the problem sat with the interest rates.
They kept getting higher and the debt they carried wasn’t being reduced.

Basically, life had handed them some lemons.

At this point, they felt they were left with one option: seek private funding. The problem with this was fear of losing their home if they approached their lender. The interest rate quoted by the private lender was less than that on their credit cards, but still higher than what was reasonable. The couple felt that seeking to obtain a second mortgage would be the best-case scenario. However, with a rate of 10% plus a lender fee of up to 6% of the loan amount and a 1 year term with renewal fee of 1% for total amount borrowed, this was not at all ideal!

This is where we stepped in and decided to make some lemonade! Here is how the story played out once they came to see us:

  1. We were able to use the income received from disability and refinanced their existing mortgage
  2. We consolidated the credit card and line of credit debt at a rate of 2.35% in doing so we reduced their current monthly payments by $1500 with an annual savings of $18,000! Or $90,000 over five years!

Here is a brief number summary to give you the full recap:

Value of the Home: $525,000

Requested Mortgage Amount: $420,000

Loan to Value: 80%

Income Documentation:

  1. Letter of employment and pay stub
  2. Letter from insurance company detailing disability payments and confirmation of deposit into current bank account.

Credit Score: 746 & 676

Total Debt Service Ratios: 41%

Mortgage Solution: All debts were paid with proceeds from their 5-year variable-rate mortgage with a 30-year amortization. The annual savings was MORE THAN $18,000!

 We helped this couple get back on track and allowed them to keep on dreaming! We understand that life rarely will stay on course and go just as you picture it, but there is often a creative solution that can help you get back on track. If life has handed you a few lemons and you aren’t sure where to start, visit a Dominion Lending Centres Mortgage Broker—they can make some of the best lemonade!

29 May

HOW TO NAVIGATE THE MORTGAGE RATE WARS

General

Posted by: Brad Lockey

You may have heard that rates are changing, and that is true. They don’t call it war for nothing and you need an expert on your side!

Think of mortgage brokers as your loyal soldiers. What we are seeing is exactly what we anticipated when prime rate goes up and discounts go down. Confused? Don’t be, variable rates are based on prime and both Bank of Canada Prime and Bank Prime are different.

What the new discount means is what it means – they anticipate prime to go up higher.

With current regulations, borrowers qualify for more mortgages on variable rates! This is a shift from the previous policy where more Canadians were having to take fixed rates to qualify for the most.

These new discounts on new mortgages getting taken out there discount is lower off of the bank’s prime rate- this does not apply to an existing mortgage

Did you notice earlier I said the bank’s prime rate, you would think they are all the same… right?

This is not the case. In November of 2016 one Canadian lender broke the trend of their counterparts and raised their internal prime to immediately impact their existing customers by adding to their amortization. This discount below was for new clients they increased the discount so it looked bigger.

It’s important to note – each lender has unique criteria to be met to get these offers: some only for purchases, some only with switches, some only certain amortizations, and some only certain property types. The list goes on!

Remember your broker shops all these lenders without bias, while protecting your credit score to assist you in finding the best one. It’s important that we evaluate the following criteria with these lenders- here is an example of three lenders:

Lender one

  • Bank has a higher Prime than anyone else
  • No change to the payment
  • Increases amortization  which can put into effect a trigger clause/cash call in on your mortgage or forced pre-payment and other costs such as appraisal at your expense
  • Not portable
  • Does have a 12-month penalty payback if getting a larger mortgage at new rates! Best one!
  • Have to go to a branch to lock in and then be subject to their IRD (usually 3-5% of balance pending where you are in your term).
  • Based on history this lender is generally the first to raise their rates and last to decrease

 

Lender two

  • Prime rate consistent with all lenders
  • Change to payment so amortization doesn’t increase
  • NO trigger clause
  • Have to go to a branch to lock in and face large IRD between 3-5%
  • Not portable but will refund you within 6 months if the mortgage is larger and will get rate available at that time

 

Lender three

  • Prime consistent with all lenders
  • Change to payment so amortization doesn’t increase
  • NO trigger clause
  • the lender will pay back penalty within 3 months of getting a larger mortgage with them
  • your mortgage expert can assist you with lock-in
  • If you lock in they have the lowest penalties in the country to break your mortgage in the future, generally 1-1.5% of the balance

With seven-in-10 mortgages breaking before the term is over, this should be weighted very carefully.

Let me demonstrate the following:

A mortgage that gets locked in with first or second lender above at $500,000, by the third year the cost to break a mortgage will be between $15,000 and $25,000. With the third lender, the cost would be between $5,000 and $7,500.

What to do with this info?

These new wars apply to new mortgages. If you have a mortgage with a discount less than .50, a renewal upcoming, looking at accessing your equity for home renovations or to consolidate debt and you have a variable rate, it may be time to run the numbers to see if taking a new variable rate mortgage is beneficial for you. One of the significant benefits of having a VRM is to get out at any time with only three months interest penalty (unless a restrictive product was taken for a better rate or had a sale only clause).

As you can see we have only scratched the surface in terms of the differences. There are many other differences and mainly you have to consider as a consumer, do you want to be calling a bank branch and play Russian roulette with the education level and sales goals of the person who guides you through deciding what to do with your biggest asset? Or would you rather have a Dominion Lending Centres mortgage professional who is in the front lines proactively guiding you and assessing the economic factors to give you personalized advice based on their experience and knowledge of the mortgage industry.

Depends on what you value most!