It seems like the news is full of negativity about the housing market slow-downs, the mortgage stress tests that shut millennials out of home-ownership, the low inventory, the slowing economy…
Although it may seem gloomy to many, there are a few silver linings – and I’m all about silver linings!
The Canadian dream of home-ownership is still alive, it just might look a bit different than our more traditional ideas of owning a home.
First of all, the make-up of home buyers has changed from the “traditional” trend of buying with a partner/spouse. According to the recent RBC Home Ownership Poll, 28% of those polled say they need help and are purchasing, or planning or purchase, with their family. That is almost as many as those who say they can purchase alone (32%).
Compared to past years, buying a home with a partner or spouse has been steadily declining (42% vs 49% in 2017), while non-traditional trends, like purchasing a home alone (32% vs 29% in 2017), are climbing!
It’s also clear that what’s happening in today’s market is having an impact on buyers with 56% of Canadians thinking it’s better to wait until next year to purchase a home. And almost have of those are prepared to push the purchase out two years or more.
Here are some more highlights from the poll:
In the poll, 8-in-10 Canadians say a home or condominium purchase is still a good investment. When we look at the condo market, there is a lot happening. This year, a record number of condos are set for completion in the Greater Toronto area, which will likely slow price growth.
Non-traditional housing and co-owning arrangements are popping up across the country. The focus is on community and co-housing projects that generally consist of individual homes with shared amenities. These amenities generally contain a kitchen and dining room.
While it’s try that the government policies have made it harder for some to qualify, the new ‘shared equity program and the RRSP withdrawal increase may help some of those people.
As we find ourselves in the Spring market, listing start to increase as buyers and sellers come out of hibernation! It’s important for home-buyers to educate themselves about mortgages, including how to qualify in this new stress-test environment. I can help you navigate the ins and outs of the mortgage process, from qualifying to approval and through to closing. It’s what I do!
And if you don’t qualify right now, I will show you ways to increase your likelihood of qualifying in the future.
Let’s talk! Because, yes…you can fulfill your dream of home-ownership.
A recent report from the Bank of Canada reviewed the impact of the government's policy changes on the mortgage market. It found that overall market activity had slowed -- something we knew would happen. The bank also found a correlation between the quality and quantity of credit. While the data shows a slowdown in "riskier" mortgages, some economists wonder if these borrowers have turned to the unregulated market.
Approximately 20% of the mortgage lending market were made up of people who borrow at least 4.5 times their annual income to buy a home. That percentage went down to 6% in the second quarter of 2018. That amount of mortgage indebtedness may or may not be a problem for borrowers; however, coupled with other debt, including credit cards, lines of credit and car loans, it may cause some financial problems as rates rise.
History of Mortgage Lending Changes
In 2016, the Office of the Superintendent of Financial Institutions (OSFI) announced a stress test for insured mortgages (mortgages with less than 20% down and requiring mortgage default insurance), stipulating that those buyers must qualify at the Benchmark rate (currently 5.34%).
Then in October 2017, a similar rule was unveiled for uninsured mortgages (mortgages with more than 20% down) stipulating that those buyers must qualify at either 2% more than the contracted mortgage rate or the Benchmark rate, whichever is higher.
These two rule changes, along with several others, including increasing minimum down payments, mortgage premium hikes, and decreasing amortization limits, have made it harder for Canadians to qualify for mortgages, which is what the government wanted for borrowers 'on the margin'. The rationale was to encourage people to take on less overall debt, including less risky mortgage debt, which would, in theory, keep housing markets safe and protect borrowers in the event interest rates increased.
Mortgage brokers can attest that the impact was seen almost immediately. The rate of clients who may have qualified previously but no longer did from large banks and traditional monoline mortgage lenders went up as much as 20%.
As a result, alternative lenders saw an uptick in business as brokers presented highly credit worthy homebuyers and refinancers with borrowing options in the unregulated space including private lenders, mortgage investment corporations (MICs) and credit unions. Some credit unions opted to include the stress test as part of their mortgage lending requirement.
The Bank of Canada admits that this segment of mortgage lending is growing, although it falls outside their purview. For example, the market share for private lenders in the GTA has grown by 50% since last year, and now makes up nearly one out of every 10 borrowers, the bank said.
There are now questions about risk in the unregulated market; however, the market is not necessarily riskier, it’s just not under OSFI’s purview. What the unregulated market is seeing are better quality mortgage clients. Hali Noble, Fisgard’s senior vice-president of residential mortgage investments and broker relations said in an interview, "A lot of these people should be bankable, but they’re not (when applying the new stress tests)."
So, many good quality borrowers have to shift down the ladder to lenders with a higher risk tolerance. The one downside is it comes with a higher cost, but not necessarily more risk. Borrowers who don’t fit into the mainstream box are now not limited to those with past credit issues, and may include those who are self-employed, those who are new to Canada, and even "A" clients. They simply don’t fit into the new box.
The Unregulated Market
The unregulated market is primarily comprised of private mortgage lenders -- companies and individuals -- who fall outside the purview of Canada's banking regulators. Private lenders offer mortgage rates higher than traditional mortgage lenders for shorter terms. Typically, borrowers who could not qualify for traditional lending turned to alternative lenders.
Alternative mortgage lenders or private lenders, also known as "B" Lenders, are more willing to look at each situation on a case-by-case basis. They do have criteria, but consider a borrower's "story". For example, if a borrower had a bankruptcy or have some credit issues, they want to know why. For self-employed borrowers, they will consider other documentation to prove income rather than a tax return, which may reflect business write-offs.
Yes, rates are higher compared to "A" lending, because the borrower profile is considered riskier, but remember it's only a short-term solution.
You can also expect to pay a larger down payment, from 15% to 35%, depending on both your situation and the property you're financing. And, there may be lender fees and mortgage broker fees. Usually, the pre-payment privileges are flexible but there may be a charge for paying out the mortgage early. Alternative lenders are strict about missed payments, and service fees may be higher as well.
Whatever the reason for needing to use an alternative lender, the goal is to get back into the "A" lending space.
Is there cause for concern?
Maybe, maybe not. The reason for all the changes was to ensure that borrowers could manage their debt loads in the future, as interest rates rise. Inadvertently, the new rules have grown the unregulated market, which may or may not defeat the purpose. People want to buy homes and will do what they need to, to get one.
The increase in demand has caused interest rates to go up even in the private sector, but these lenders are short-term lenders. There must be an exit strategy. There is the risk that borrowers will rely on the private funds for longer terms, which may have a negative financial impact.
The Bank of Canada is also concerned about the potential for mortgage default and bankruptcies. Consumer insolvencies peaked during the 2007-08 financial crisis and have been relatively stable since 2012. Around 120,000 Canadians went insolvent last year, less than 0.4 per cent of the country's population.
Purchasing a home is a big financial commitment. In addition to moving costs and closing costs, most home purchases require a down payment of at least 5% of the purchase price. This is the amount of money you are personally committing.
Coming up with a down payment can be challenging; however, there are options, depending on the lender, the location of the purchased property, the loan to value and your credit score.
Ideally, you’ve saved the down payment in a savings account or have an RRSP, from which you can withdraw up to $25,000 with no penalty under the Home Buyer’s Plan (HBP). If you choose to take advantage of the HBP, here is what you need to know.
RRSP Withdrawal Conditions
I’d also like to mention the First Time Home Buyer’s Tax Credit (HBTC). You will qualify if:
The tax credit is not connected to Home Buyer’s Plan so your eligibility for the tax does not change whether or not you also participate in the Plan.
Lots of info here, so reach out and let's discuss it together!
Your Road to Mortgage Freedom
Do you dream about paying off your mortgage? The new year is usually a time when people review their finances and, if they are in debt, create a plan to reduce that debt. With interest rates rising in Canada, the perennial question resurfaces: Should you pay off your mortgage early? Or invest your money instead? Paying off your mortgage may be the best investment you can make.
Here are some ways to save some serious money and become mortgage-free faster. It only takes a few small steps and may save you thousands of dollars in the process.
Accelerate your payment frequency
This is a popular strategy. If you’re making monthly payments on a $300,000 mortgage with a 3% interest rate, amortized over 25 years, it will cost you approx. $125,920.44 in interest. By increasing your payment frequency to accelerated bi-weekly payments, you will shave nearly three years off of your amortization schedule, and save approx. $16,058.57 in interest.
Round up your mortgage payment
This is pretty painless. Every dollar counts when it comes to paying off your mortgage. If your accelerated bi-weekly mortgage payments are $543, consider rounding up to $600 instead. The extra $57 can save you thousands of dollars in interest over the term of your mortgage and you might not even notice the difference in your monthly budget.
Refinance to a shorter-term amortization
You may be able to refinance into a mortgage for 10, 15 or 20 years. Your payments will be higher on a 15-year amortization, but perhaps not as high as you think.
Make lump sum payments
Adding just $1,000 extra to your mortgage per year will allow you to pay it off sooner and, combined with accelerated bi-weekly payments, can chip off a substantial amount of the interest as well.
A lower interest rate
It doesn't hurt to work together to see it we can negotiate a better rate. The difference between a 3.49 % and a 4.29 % rate can add up to significant savings in interest over the term of the mortgage.
It’s easy to forget about your mortgage when you’re making automatic payments. It’s a good idea to keep up-to-date on mortgage options and interest rates, which could potentially save you thousands of dollars.
The freedom of being completely debt-free is a dream for many Canadians. If you’re unsure of what your next step should be, call me. Together we can review your mortgage, look at your financial picture and devise a mortgage-reduction plan that works for you.
Separation and divorce can impact a family on many levels including financially. It's a stressful process for all concerned.
In addition, there may be the messy business of splitting the assets, including the family home and the mortgage. Many couples end up selling the house to pull out their equity, which may cause additional stress. However, there are other options.
For most couples, their home is their largest asset and where they have the majority of their equity. If one spouse prefers to stay in the home, it may be possible to get a new mortgage to purchase the property from the other spouse for up 95% of the property’s value.
It’s the Spousal Buyout Program and allows one spouse to keep the home while paying the ex-spouse their portion of the home’s equity. This can create some stability for the family during this often-trying time.
Similar to other mortgages, the purchasing spouse must qualify to carry the loan. A legal Separation Agreement and a Purchase Agreement is also required.
Each province and territory have their own laws regarding the division of family/marital property. Generally, marriage is seen as an equal partnership in the eyes of the law, so for the most part, anything that has been acquired during a marriage and is still owned at the time of separation would be divided equally.
The "matrimonial home" is the space where both spouses have their primary residence at the time of separation, and regardless of whose name is on the title of the house, both parties have an equal right to the home unless there is an agreement that states otherwise.
Here are a few requirements for a Spousal Buyout:
If you have any questions about this program or would like to review your options, reach out to me today.
Here’s a typical scenario: You and your spouse are applying for a mortgage loan. You’ve had credit for years with three or four credit cards, a car loan and a line of credit. You always pay the minimum obligation, and always on time. Your spouse, on the other hand, doesn’t use much credit, perhaps has only two or three credit lines and has missed a payment or two in the past two years. The lender pulls your credit report and your spouse has a higher score than you. Here’s why that happens.
First of all, a credit report is a “snapshot” of you and your credit history. The report includes personal information, employment information, credit information, information about judgments and collections, as well as a list of companies that have requested a credit report. Your credit score is a number from 300 to 900, which the lender uses to determine your risk factor. For example, a score of 680 means 680 people out of 900 are likely to repay their debt.
So, how do the credit bureaus determine these scores? They use five factors.
To know more about credit scores and how to get your report, call me today.
There are times in our lives when the unexpected happens and we find it difficult to cope financially. It could be a job loss, an unexpected illness, the death of a loved one or separation and divorce. There may be enough money to get by for a few months, but soon families may find themselves overwhelmed as the bills start to mount and household finances begin to dwindle. Then households may start to miss payments to creditors, including a mortgage payment. While a one-time missed payment can easily be dealt with, long term problems may need a different approach. Consider the following:
Let’s talk. Call me today.
Before you take possession of your new abode, you need to consider any and all additional costs of obtaining your mortgage. We call these closing costs. Generally estimated around 1 – 1.5% of the price of the home, these are the unavoidable costs that are the last hurdle between you and glorious home ownership.
Due upon the acceptance of your purchase offer, a deposit is essentially a gesture of good faith between the buyer and the seller. A minimum deposit is usually around $5000.00. This is something your realtor will help you with.
Mortgage loan insurance
This is a mandatory expense for buyers who make a down payment of less than 20%. Administered through one of the three insurers we have in Canada; the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or AIG, the cost of this insurance depends on the amount of your down payment and also certain details of your application. The premium ranges from between 0.5% all the way up to around 6% if you are self employed and putting only 5% down. This premium is charged on the amount of the mortgage and can be added on to the mortgage.
Real estate agents normally counsel buyers to make an offer on a home conditional on the outcome of an independent home inspection. A home inspector looks for items that could affect the price and desirability of a home, such as outdated wiring, shabby roofing, an elderly furnace or cracks in the foundation. The fee depends on the home’s size, age and the amount of time it takes to do a thorough inspection. Approximate cost $400-500.00.
Canadian law states that a home owner must have fire insurance on his or her new property effective when he or she takes possession. If the home inspection turned up antiquated wiring or other problematic features, a potential insurer may refuse to cover you unless you get it fixed. Rule of thumb: Factor in all costs required to pacify the insurance company.
A lawyer is vital to any home deal. He or she is responsible for research, handling documents, mediating with the seller’s attorney, transfer of land title and much more. Approximate cost $800-1300.00.
This protects you from any unpleasant revelations about your property’s history that might crop up in the future. Unless you pay for a survey, it’s difficult to ascertain a comprehensive history of your property. In order to deal with potential errors or omissions in the public registry or secret heirs to the land, most new homeowners buy title insurance. The fee depends on two factors. The first is whether the property is urban or rural; title insurance costs more out in the country because there’s a greater chance that the property may contain an undisclosed structure, such as a well or a septic tank. The second factor depends on whether it’s a single residence or a multiple-family dwelling (such as an apartment); the cost is more in the latter case. This is obtained through your lawyer and is approximately $200-250.00
Unless you take possession on the first of the month, you must prepay the amount of interest accrued up to the first day of the next month. This depends on what payment structure you have chosen (monthly, bi weekly, weekly, etc). That sum is due on your closing day or with your first payment, depending on the lender.
The seller may be entitled to a reimbursement, from you, if she has prepaid bills (water, gas or hydro) or property taxes.
Whether you’re hiring professional haulers or conscripting friends and family to lug boxes, you can expect an outlay of cash on moving day.
Service activation fees
Once you move into your new dwelling, you’ll inevitably have to pay activation fees for utilities such as phone, cable, gas and electricity.
Forwarding your mail
You’ve made a point of apprising the important people in your life — family, friends, employers, the bank, the utilities, your credit card company — of your new address. But you’re bound to forget someone. To ensure you don’t miss any crucial mail, you should get Canada Post to forward mail sent to your old address to your new residence. You can sign up for the service online or at any post office. The cost is about $30 for six months, but peace of mind is priceless.
An appraisal may be required to determine the market value of the property you are buying. If you are putting more than 20% down the appraisal is at your cost and they generally start at $350 and go up depending on the appraisal company, the size of the property and its location. For example, properties over 1800 square feet have a higher cost as well as acreages depending on the amount of land and where they are located.
So you got behind on that credit card payment...
Or you were laid off for awhile and couldn’t keep up with your car payments...
Or that student loan is in arrears because it took you a while to secure a job...
But now your credit score is lower and you want to move on with your life – maybe buy a house or get a new car. Don’t underestimate the power of your credit score. It not only reveals to a lender if you’re a good credit risk, it’s also the basis for the interest rate you’ll pay. In today’s credit world, if your score is low you can still get a loan for a car or a home, but it will cost you. Lenders may charge extra fees and will certainly charge you a higher interest rate. This is a costly proposition. However if you’re patient and persistent, you can improve your credit score in six to eight months. Here’s how:
Yesterday the B.C. Government released it's 2018 Budget and there were some notable changes. Here are some big ones from the 30-point plan...
For the housing measures, read here:
As always, if you have any questions or concerns, reach out!
It's me again! I will be posting articles with more in depth information regarding specific mortgage scenarios. I do my best writing when my kids are asleep...