I thought it would be prudent to write my most recent blog about something that has reared its head several times of late.
As a Mortgage Broker who focuses a large portion of my business on first time and young homeowners I am often presented with some unique scenarios.
The most common concern that I have found from the underwriting side is when a parent is the guarantor on the mortgage. Many young people may be at a stage in their career where they can carry a mortgage and everything that goes along with it, however they narrowly miss qualifying for one for a variety of reasons. In these situations, parents will appear on the mortgage as a guarantor.
Unlike other types of loans like car loans for example, where the co-signor simply is on the loan as a security measure, with a mortgage the guarantor must be fully qualified along with the primary applicant.
Therefore, although the guarantor may not be involved in the process of finding a house or finding a mortgage when it comes time to verify their finances they will have to provide as much - and if they are the source of the down payment - more information than the primary applicant.
The comment I most often hear is, " I have never had to provide this information before."
That may very well be the case if you haven't obtained a high-ratio mortgage in the past year, however if you are interested in enterting the Canadian housing market NOW and don't have 20% to put down, then be prepared until a drastic change in the Canadian psyche appears, to go along with it.
When the housing market in the United States crashed in 2008 and consequently their entire economy toppled over, many looked at the mismanagement in the housing sector as a major cause.
The American mortgage market is much different than ours north of the border. Americans are able to deduct the tax from their mortgages and many use a huge mortgage as a tax planning strategy. There have been noted cases that have depicted transplanted Canadians with their inherently conservative Canadian financial mindset who bought homes within their price range and survived the meltdown in the US. Conversely, there have also been as many stories about Americans who like in 3000 sq ft homes who couldn’t afford to heat them.
I digress.
The Canadian financial system has always been relatively, if not substantially more conservative than those in many other countries. This is clearly evident when it comes to the mortgage market.
I have on several occasions met CMHC employees or contractors who have been hired by foreign governments to go teach their bankers how to implement the Canadian mortgage system into their markets.
This brings us to CMHC, the Canada Mortgage and Housing Corporation. CMHC is a Crown Corporation that among other things ensures Canadian mortgages that have less than a 20% down payment.
On July 9, 2008 the Department of Finance released a press release entitled “GOVERNMENT OF CANADA MOVES TO PROTECT, STRENGTHEN CANADIAN HOUSING MARKET”
Link
Even though the market was always strong in Canada – mortgage defaults in Canada are still only around .40% - with trouble on the horizon in the American market CMHC decided to bolster their mortgage requirements.
The new measures they announced included:
- Fixing the maximum amortization period for new government-backed mortgages to 35
years;
- Requiring a minimum down payment of five per cent for new government-backed
mortgages;
- Establishing a consistent minimum credit score requirement; and
- Introducing new loan documentation standards.
The issue that I am writing about in this blog is the last point; introducing new loan documentation standards.
If you are paying less than 20% down on a property, the Government is going to ask you for documentation to be fully satisfied that the mortgage they are guaranteeing is up to their standards, which as we now know is one of if not the highest in the World.
The days where you could walk into a bank and say, “here is $5000 in cash, I want to buy this house!” are long gone. These minimum documentation requirements mean that no matter how much money you have or how long you have been a homeowner for, if you are applying for a NEW government insured mortgage you will be required to undergo the government’s scrutiny.
These measures should not be misconstrued as something that the lender themselves are forcing you to do. It is a Canadian Government mandate to ensure the validity and strength of the mortgage holders and in order to have the mortgage ensured by the government the lenders must play ball.
Some people, understandably, may still disagree with asking for banking records and employment details, but the flip side as we have seen, is a housing market that freely lent money and consequently went belly up and will take many years to fully recover.
So next time your Bank asks you for what you may feel is too much information, keep in mind you could always be the American who has the McMansion but can’t afford to heat it.
Tuesday, October 27, 2009
Wednesday, October 7, 2009
The Globe Offers Sage Advice to Young Homeowners
Educating young home owners is something that I focus a large portion of my attention to.
The Globe and Mail have a series called "Building Blocks: A Financial Foundation for Young Families"
A recent edition features Doug Melville Canada's banking Ombudsman speaking about things to take into account when signing your first mortgage contract.
What I like all my young clients to take out of things like this is, first of all; realize that being pre approved for $350,000 does not mean that is what you can afford when you take into account living expenses. Don't make the mistake of being house poor because your Bank said they would lend you as much money as you wanted for your home.
Secondly, make sure you absolutely know your product. With so many mortgage options available in the marketplace its important you obtain one that is tailored to your specific circumstances.
Check out the video here.
The Globe and Mail have a series called "Building Blocks: A Financial Foundation for Young Families"
A recent edition features Doug Melville Canada's banking Ombudsman speaking about things to take into account when signing your first mortgage contract.
What I like all my young clients to take out of things like this is, first of all; realize that being pre approved for $350,000 does not mean that is what you can afford when you take into account living expenses. Don't make the mistake of being house poor because your Bank said they would lend you as much money as you wanted for your home.
Secondly, make sure you absolutely know your product. With so many mortgage options available in the marketplace its important you obtain one that is tailored to your specific circumstances.
Check out the video here.
Wednesday, September 23, 2009
TD Jacks up Secured LOC Rates
TD Bank just announced that they are increasing the Home Equity Line of Credit interest rate to Prime plus 1 %from the current Prime rate. Rob Carrick of the Globe and Mail wrote an article you can fine here about the issue.
What does this mean for your mortgage?
If you have a large balance on your Line of Credit and cannot pay it down, it may be worth looking into adding that balance to a variable rate mortgage.
There are two potential benefits to this. First of all the rise in the HELOC rates are acting in opposition to the downward trend of variable rates in the market. Just recently ResMor a broker only lender began offering a 4 year variable at Prime 2.25%. Some industry leaders suggest that we are maybe a month away from seeing a Prime minus variable product on the market.
By converting your HELOC into a variable you still get the variable product, but at a lower rate than the Prime plus 1% that was just announced.
A second consideration is that interest on mortgages is generally compounded semi-annually, whereas Lines of Credit are typically compounded monthly.
Thereforeyour savings are twofold - you get the benefit of a lower variable rate and save some added money by having your interest compounded semi-annually instead of monthly.
Something to consider.
John Shearer
What does this mean for your mortgage?
If you have a large balance on your Line of Credit and cannot pay it down, it may be worth looking into adding that balance to a variable rate mortgage.
There are two potential benefits to this. First of all the rise in the HELOC rates are acting in opposition to the downward trend of variable rates in the market. Just recently ResMor a broker only lender began offering a 4 year variable at Prime 2.25%. Some industry leaders suggest that we are maybe a month away from seeing a Prime minus variable product on the market.
By converting your HELOC into a variable you still get the variable product, but at a lower rate than the Prime plus 1% that was just announced.
A second consideration is that interest on mortgages is generally compounded semi-annually, whereas Lines of Credit are typically compounded monthly.
Thereforeyour savings are twofold - you get the benefit of a lower variable rate and save some added money by having your interest compounded semi-annually instead of monthly.
Something to consider.
John Shearer
Wednesday, September 9, 2009
A Real Life Debt Consolidation
Debt consolidation can be extremely beneficial for any homeowner who has debts that may be at high interest rates, an assortment of varying balances between debts or plain and simple , a lot of debt.
Often homeowners have equity in their home which is not being used and is sitting idle. Meanwhile homeowners are being burdened with heavy debt loads and high interest rates.
Below is an example of a couple who used the equity in their home to their advantage and as a result realized huge savings.
Jim and Nancy have a house they purchased 9 years ago. During this time they have taken out a line of credit to do renovations on the home. They also have two credit cards whose balances need to be paid monthly as well as a car loan.
Their monthly debts look something like this:
Mortgage:
(25 year amortization)
$200,000
Monthly Payment $1169
Credit Cards
(18% Interest)
$8000 Balance
Monthly Payments: $250
Line Of Credit
(8% Interest)
$20,000 Balance
Monthly Payment: $130
Car Loan
(5% Interest)
$14,000 Balance
Monthly Payment $540
Total Debt: $242,000
Total Monthly Payments: $2,089
In this scenario Jim and Nancy increased their mortgage from $200,000 to $242,000. They paid out their high interest debts and had only a single monthly debt to worry about.
By increasing their mortgage from $200,000 to $242,000 the monthly payment went from$1169 to $1,407 which is only an increase of $238 per month.
What are the Benefits to Jim and Nancy?
As a result of consolidating their debt their five monthly payments have been cut down to a single monthly obligation.
By paying out the high interest items Jim and Nancy’s interest cost has been reduced dramatically.
Most importantly for them though is that they now have an opportunity to save thousands of dollars.
The most interesting part of this scenario comes when we increase the mortgage payment. Jim and Nancy have a mortgage payment of $1,407. If we increase that payment to the $2,089 that they were already used to paying it would have a significant impact for them.
By simply increasing the mortgage payment to $2,089 the mortgage amortization falls from 25 years to 13 years.
This creates an interest savings of over $90,000!!
By decreasing the amortization from 25 years to 13 years the interest component on the mortgage is greatly decreased.
Now if Jack were to save $1,407 per month for the 12 years that he would have been paying his mortgage he would accumulate $278,846 at a rate of 5%.
To discuss how you can use the equity in your home please contact me.
Often homeowners have equity in their home which is not being used and is sitting idle. Meanwhile homeowners are being burdened with heavy debt loads and high interest rates.
Below is an example of a couple who used the equity in their home to their advantage and as a result realized huge savings.
Jim and Nancy have a house they purchased 9 years ago. During this time they have taken out a line of credit to do renovations on the home. They also have two credit cards whose balances need to be paid monthly as well as a car loan.
Their monthly debts look something like this:
Mortgage:
(25 year amortization)
$200,000
Monthly Payment $1169
Credit Cards
(18% Interest)
$8000 Balance
Monthly Payments: $250
Line Of Credit
(8% Interest)
$20,000 Balance
Monthly Payment: $130
Car Loan
(5% Interest)
$14,000 Balance
Monthly Payment $540
Total Debt: $242,000
Total Monthly Payments: $2,089
In this scenario Jim and Nancy increased their mortgage from $200,000 to $242,000. They paid out their high interest debts and had only a single monthly debt to worry about.
By increasing their mortgage from $200,000 to $242,000 the monthly payment went from$1169 to $1,407 which is only an increase of $238 per month.
What are the Benefits to Jim and Nancy?
As a result of consolidating their debt their five monthly payments have been cut down to a single monthly obligation.
By paying out the high interest items Jim and Nancy’s interest cost has been reduced dramatically.
Most importantly for them though is that they now have an opportunity to save thousands of dollars.
The most interesting part of this scenario comes when we increase the mortgage payment. Jim and Nancy have a mortgage payment of $1,407. If we increase that payment to the $2,089 that they were already used to paying it would have a significant impact for them.
By simply increasing the mortgage payment to $2,089 the mortgage amortization falls from 25 years to 13 years.
This creates an interest savings of over $90,000!!
By decreasing the amortization from 25 years to 13 years the interest component on the mortgage is greatly decreased.
Now if Jack were to save $1,407 per month for the 12 years that he would have been paying his mortgage he would accumulate $278,846 at a rate of 5%.
To discuss how you can use the equity in your home please contact me.
Monday, August 17, 2009
The Reality of Extended Amortizations
For any reader who is unfamiliar with the term, the amortization period of a mortgage is the time over which the mortgage is to be completely repaid, assuming equal payments. This means that when looking, for example, at a mortgage with a 25-year amortization period, it would take 25 years to reduce the balance to zero, if all regular payments were made on time and the terms (payment, interest rate) remained the same.
As anybody who has ever had a mortgage knows, the interest component of a mortgage is often much greater than the principle component at the outset of payments. By extending your amortization, for example, from 25 years which is a standard amortization to say a maximum amortization of 35 years, several things will happen. This will decrease the amount of monthly payment you actually have to pay, which is why people extend the amortization for affordability reasons. However, it also greatly increases the interest component versus principle reduction of the mortgage.
Let’s take a look at what point in the duration of a mortgage you actually begin paying off more principle than interest.
Assuming a $100,000 mortgage at 4.30%
As you can see by this chart, even with a typical 25 year amortization it still takes 8.8 years to before you begin paying off a greater proportion of principle than interest.
Note of course that this assumes a standard monthly payment. By undertaking strategies like making lump sum payments, increasing the payment amount or adopting payment frequencies such as accelerate bi-weekly payments, you will achieve principle reduction much sooner.
If you have any questions on amortizations or how to pay off your mortgage faster please contact me.
John Shearer BA (Hons)
Mortgage Agent FSCO Lic# M09000725
C: 905-320-33474
B: 289-337-9718
E: John.Shearer@verico.ca
Friday, August 7, 2009
Mortgages For The Self-Employed
Mortgage products are not one-size-fits-all. As a Mortgage Planner I strive to think outside the box in order to find my clients the best products to suit their needs. Unlike the banks who require the borrower to fit into their own narrow lending guidelines, I determine what my client’s goals are and fit those into the best product for my client.
One area where this is often the case is with self-employed borrowers. Today, approximately 1 in 5 Canadians are self-employed, and with the current economy the numbers are increasing. In June alone the number of self employed workers rose by 37,000.
To address this growing market, mortgage lenders are offering more products for the self-employed borrower. Traditionally the biggest problem with qualifying for a bank mortgage is that income is more difficult to prove for someone who is self-employed.
With self-employed borrowers, there are generally two different product stems that are available; proven income and stated income.
Proven income products utilize the individual’s income that was reported to Revenue Canada. The most common method of determining income is for the lender to determine the average of line 150 from the borrower’s three most recent years’ tax returns.
Here is one example of what this would look like.
First, the income is calculated by adding up the previous 3 years NOA’s (Notice Of Assessment) and averaging them.
2006 Income $50,000
2007 Income $75,000
+2008 Income $100,000
Total $225,000 divided by 3 = $75,000 average income used to qualify.
That is the basic income qualification for self employed programs, although there are exceptions. If applicants can demonstrate income increases year after year for four years then they may accept the most recent year’s income amount.
With proven income mortgages many lenders will perform what is called an “income gross up”, whereas they will add 15% to the average income to account for deductible expenses of the borrower.
This means that if $75,000 is used as the amount of income earned it is then multiplied by 15% to increase the actual amount to $86,250.
It is important to note that not all lenders will allow the “income gross up” or “add backs” with their products and it is highly dependent on the borrower’s net worth and credit score. For those who can utilize this however, it is a great benefit.
The other option for self-employed borrowers is the stated income mortgage. Basically, the stated income programs allow a borrower to qualify for the loan on the income they say they make, rather than what their tax return says. This product is ideal for borrowers who may not qualify based on the averaging method of the proven income method or just for those who do not want to provide income verification.
With this product most lenders will require at least two years of self-employment and strong credit ratings.
As the percentage of self-employed borrowers applying for mortgages increases so will the need for mortgage products to service these needs. A mortgage planner is able to ascertain which self-employed product, with which lender, will best meet your goals and needs. If you have any questions about mortgages for the self-employed or any other mortgage concerns feel free to contact me.
John Shearer BA (Hons)
Mortgage Agent FSCO Lic# M09000725
Cell: (905) 320-2247
Fax: (866) 442-6710
Bus: (289) 337-9718
Email: John.Shearer@verico.ca
One area where this is often the case is with self-employed borrowers. Today, approximately 1 in 5 Canadians are self-employed, and with the current economy the numbers are increasing. In June alone the number of self employed workers rose by 37,000.
To address this growing market, mortgage lenders are offering more products for the self-employed borrower. Traditionally the biggest problem with qualifying for a bank mortgage is that income is more difficult to prove for someone who is self-employed.
With self-employed borrowers, there are generally two different product stems that are available; proven income and stated income.
Proven income products utilize the individual’s income that was reported to Revenue Canada. The most common method of determining income is for the lender to determine the average of line 150 from the borrower’s three most recent years’ tax returns.
Here is one example of what this would look like.
First, the income is calculated by adding up the previous 3 years NOA’s (Notice Of Assessment) and averaging them.
2006 Income $50,000
2007 Income $75,000
+2008 Income $100,000
Total $225,000 divided by 3 = $75,000 average income used to qualify.
That is the basic income qualification for self employed programs, although there are exceptions. If applicants can demonstrate income increases year after year for four years then they may accept the most recent year’s income amount.
With proven income mortgages many lenders will perform what is called an “income gross up”, whereas they will add 15% to the average income to account for deductible expenses of the borrower.
This means that if $75,000 is used as the amount of income earned it is then multiplied by 15% to increase the actual amount to $86,250.
It is important to note that not all lenders will allow the “income gross up” or “add backs” with their products and it is highly dependent on the borrower’s net worth and credit score. For those who can utilize this however, it is a great benefit.
The other option for self-employed borrowers is the stated income mortgage. Basically, the stated income programs allow a borrower to qualify for the loan on the income they say they make, rather than what their tax return says. This product is ideal for borrowers who may not qualify based on the averaging method of the proven income method or just for those who do not want to provide income verification.
With this product most lenders will require at least two years of self-employment and strong credit ratings.
As the percentage of self-employed borrowers applying for mortgages increases so will the need for mortgage products to service these needs. A mortgage planner is able to ascertain which self-employed product, with which lender, will best meet your goals and needs. If you have any questions about mortgages for the self-employed or any other mortgage concerns feel free to contact me.
John Shearer BA (Hons)
Mortgage Agent FSCO Lic# M09000725
Cell: (905) 320-2247
Fax: (866) 442-6710
Bus: (289) 337-9718
Email: John.Shearer@verico.ca
Wednesday, July 29, 2009
Tax Deductible Mortgages
I recently had someone ask me what the deal was with tax deductible mortgages. Unlike with the Americans, in Canada it isn't easy for us to deduct mortgage interest from our income taxes.
In Canada the most known method of making a mortgage tax deductible is by utilizing the Smith Maneuver, popularized by its namesake Fraser Smith. The Smith Maneuver looks like this:
In Canada the most known method of making a mortgage tax deductible is by utilizing the Smith Maneuver, popularized by its namesake Fraser Smith. The Smith Maneuver looks like this:
- Acquire readvancable mortgage (these mortgages have LOC's attached to them so that you can reborrow the amount of principle you have paid off on each mortgage payment as a LOC)
- Sell your non-registered assets (stocks held outside an RRSP)
- Use the proceeds as a down payment on your mortgage
- Make your mortgage payments
- As you make payments, re-borrow the principle through your LOC component
- Invest this re-borrowed money at a higher Rate of Return than the LOC interest
- Deduct your LOC (investment loan) interest and use the tax savings to prepay your mortgage
- Repeat steps 3-7 until you are mortgage Free!
That is a brief summation of how the Smith Maneuver works.
Recently Jonathon Chevreau of the Financial Post write this article on the Tax Deductible Mortgage Plan, which has become one of Canada's fastest growing companies.
A tax deductible mortgage is a great way to pay your mortgage off faster and as the article illustrates is becoming a tool that many Canadians are now using.
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