I have included below an an advance copy of my soon to be published book “The Definitive Guide to Mortgages in Canada”.  This book is a comprehensive guide to everything mortgages in Canada and how it impacts you.  The below copy has been optimized for online reading and should be easy to navigate via the table of contents page links.  I appreciate your feedback and always welcome the opportunity to discuss and look after your mortgage approval with you.

Rylan

The Definitive Guide to Mortgages in Canada

(as written by an industry insider)

By Rylan Hahn

Copyright ©Rylan D. Hahn. All rights reserved.

Published by 1780968 Alberta Ltd, Suite 300, 160 Quarry Park Blvd SE Calgary, AB Canada T2C 3G3.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise except as permitted under section 107 or 108 of the United States Copyright Act, without prior written permission of the author and publisher.

Requests to the publisher for permission should be addressed to:

Rylan D. Hahn, Suite 300, 160 Quarry Park Blvd SE Calgary, AB Canada T2C 3G3 or via email.

Limit of liability/ Disclaimer of Warranty: While the publisher and author have used their best efforts to prepare this eBook, they make no representations or warranties with respect to the accuracy or completeness of the contents of this publication and specifically disclaim any implied warranties of legal information.

The advice and strategies contained herein may not be suitable for your situation. Neither the publisher nor author shall be liable for any loss of profit or any potential other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Date of publication v1.0: February 20, 2014.

Introduction

My purpose in writing this book is two fold, first it is a way for me to tangibly give back to our many past and future Canadian mortgage clients by bringing clarity, honestly, and candor to the mortgage process. Secondly, if you are reading this book and are looking for a mortgage professional I unashamedly want to be that person and I hope that by you reading this book you will grasp the professionalism, fun, and excellence that I seek to bring to every mortgage transaction with our clients.

The information and knowledge contained within this book has been hard earned by myself over the years through personally underwriting or reviewing over a quarter of a billion dollars of mortgage transactions. The Canadian mortgage industry currently has some pretty good technical resources through CMHC and Genworth along with a couple of the banks, however I have found that technical resources without practical application and industry insight are of minimal use. In this book I have sought to pull back the curtain on the mortgage industry as it relates to our clients by explaining mortgage fundamentals, giving an outline of unique mortgage products, trying to guard you against lenders’ tricks that can cost you thousands, and by giving you a real world understanding of what goes on behind the scenes when you are buying or refinancing your home.

I welcome your feed back, mortgage questions, and would be happy to personally discuss your mortgage options with you.

All the best,

Rylan Hahn

The Basics

The Building Blocks of your Mortgage

Your mortgage is built as a function of three major components, your down payment or equity in the case of a refinance, credit, and income.

Down payment:

Your down payment is divided into two categories, the amount of down payment and the source:

The amount:

• Within Canada the minimum down payment for new home purchases is 5% of your purchase price. The minimum equity required is 20% for a refinance.
• These amounts and limits have been set by the government and are imposed upon all major banks and trust companies. The exception to this rule is in the case of private lending where these restrictions do not necessarily apply.
• For almost all purchases in Canada that have less than 20% down payment, your mortgage is insured against default for the lenders by either CMHC, Genworth, or Canada Guaranty. More on this in the “mortgage insurers” section.

The source:

• The government asks lenders to verify the source of the funds of down payment for all purchasers as a part of the anti money laundering act.
• Down payment can be deemed to be from either your “own funds” ie: cash, sale of investments, borrowed against a hard asset, or family gift, or they can be “borrowed” ie: an unsecured line of credit.
• For “borrowed” funds the lending field is narrower, underwriting can be more restrictive, and rates might be a bit higher.

Credit:

Your credit is calculated into a number called a beacon score, this is a number out of 900 and takes into account several factors including:

• The amount of credit you owe versus your limits
• Your past repayment history including any missed or late payments
• The length of time you have had credit
• The number of credit items you have
• The types of credit you have, for example instalment loans (vehicle loans, student loans, investment loans) and revolving credit (credit cards and lines of credit)
• The number of recent credit enquiries

Most mortgage lenders look for a minimum credit score in the low to mid 600’s in additional to typically wanting clients to have two credit items with two years of repayment history. If clients are shorter on credit, depending upon the lender, there are sometimes some more flexible solutions we can work through. These flexible options include an exception where we use 12 months of bank statements for you. Within these bank statements we will look for 12 regular monthly rental payments along with one other regular payment such as your utilities, phone bills, or vehicle insurance. If we are able to show this history we are often able to obtain an exception to the traditional credit requirements.

Bankruptcy and consumer proposal:

If you have experienced either of these, the general lender guidelines for mortgage approval is they will ask for you to be discharged for two years and have one year of reestablished credit with two significant credit items such as a vehicle loan and a credit card with a limit of $2000 or more. If you do not have the asked for amount of time discharged or the reestablished credit we can still consider approving you for your mortgage if you have a down payment of 35% of your purchase price or if you have a strong co-signer.

Income requirements and qualification ratios:

Income guidelines:

For employed clients, lenders will often ask us for an employment letter and a recent pay stub to confirm your employment, some lenders will ask for personal tax returns in lieu of an employment letter.

If we are using overtime or variable income, lenders will often ask for a two year history and then average the two years to determine the amount of income they can use for you. If you have been receiving the overtime or variable income for less than two years but more than one year we are often able to obtain an exception by using your last years personal tax return income and then averaging it with your annualized current year to date pay stub. The closer we are to a two year history the greater our chances of obtaining your approval are.

For self employed income, lenders will require you to be self employed for two years and then will average your last two years personal tax notice of assessment line 150 total income amounts. We have many self employed clients who cannot qualify based upon these numbers due to company write offs or through retaining earnings within their corporation. In this case we do have several other excellent options that I will explain in detail in the “self employed mortgages” section.

Income ratios (how much mortgage you can qualify for):

Lenders use a combination of two different ratios when determining how much mortgage you qualify for:

• Gross debt ratio (GDS) – this is a measure of how much of your gross annual income goes toward your housing payments. The housing payments include: mortgage payments, property taxes, condo fees if applicable, and heat. This ratio as a general rule cannot exceed 35% – 39% of your total gross income.
• Total debt ratio (TDS) – this is a measure of how much of your gross annual income goes toward your overall monthly payments. This includes your housing costs in addition to any other debt payments you have such as: vehicle payments, credit card, line of credit, student loans, and investment loans. This ratio generally cannot exceed 42% – 44% of your total gross income.

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Types of Mortgages

If we look at your mortgage as a tree branching off, the first branch of your mortgage are open and closed mortgages, followed by the second branch of fixed and variable mortgages. Open and closed mortgages have both fixed and variable options.

Open and Closed mortgages:

In a typical market, over 90% of the mortgages we approve for our clients are closed mortgages. The difference between open and closed mortgages is that open mortgages do not have a pay out penalty for early repayment where as closed mortgages do. The trade off is that open mortgages charge a higher interest rate than closed mortgages for the flexibility they offer. Open mortgages tend to be a good fit for clients who regularly buy, renovate, and sell homes and turn around the property in 3-4 months. As a general rule, once clients have owned a home for more than about 6 months they are better having chosen a closed variable and paying the payout penalty than having an open variable mortgage.

For example (in simple interest terms):

• If we assumed a $300 000 mortgage amount with a closed variable (3 months of interest early pay out penalty) at 2.5% versus an open variable (no payout penalty) at 4.0% the calculation is a follows:
• The pay out penalty at 3 months of interest is $1875, the monthly difference in interest paid between the higher open variable rate and the lower closed variable rate is $375, so in this case your break even point is 5 months ($375 monthly difference in interest x 5 months). This means that if you are going to be keeping the property for more than 5 months your better choice is to obtain a closed variable and then pay the penalty upon sale rather than an open variable due to its higher overall cost.

When you are selecting a mortgage professional to work with it is very important that you select someone who seeks to understand your goals and at the same time has the professional knowledge to understand how to approach your mortgage options to maximize your benefit.

Fixed and variable mortgages:

The historic division in Canada between fixed and variable mortgage choices is about 50/50, however at various times in history the choice had been much more slanted to one option over the other due to market conditions and lender offerings.

Fixed rates are based upon the bond rates and the lender spread above the Government of Canada benchmark bond rate for your term selected.

Variable rates are based upon the bank of Canada prime rate, the prime rate can change up to 8 times per year on a two months on one month off schedule but tends not to change that frequently.

The difference between fixed and variable rates is that with fixed rates you know exactly what your payments are for the entirety of your mortgage term, where as your variable rate can increase or decrease throughout your term. In exchange for the potential added risk you tend to receive better rates for variable mortgages than fixed rates.

As a general rule, when we are choosing between fixed and variable rates we like to see the variable rates at least 1% less than the comparable fixed rate. This tends to provide sufficient cushion for our clients in the event of a prime rate increase and also reward you through greater interest savings in exchange for your potential added risk in mortgage fluctuations by choosing the variable.

Depending upon the lender, variable rate mortgages can be locked into a fixed rate for your term remaining at any time, this can be a useful strategy and can safeguard you against significant prime rate increases.

Penalties for early repayment vary as well, for most variable mortgages it is 3 months of interest, however for fixed rates it is the greater of either three months of interest or the interest rate differential (IRD). More on the IRD in the section called “ pay out penalty calculations”.

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Private mortgages

Private mortgages fill the gaps in the Canadian mortgage industry where the banks and trust companies are not able to traditionally lend. The most important thing to consider before taking out a private mortgage is your exit strategy. If you do no have a realistic plan to repay this mortgage in a relatively short period of time, my advice is to not take the mortgage. There are two predominant areas of private mortgage lending:

Lending for individuals:

• In my opinion this is the most dangerous area of private lending for people as they are often consolidating debts through accessing their home equity. The advantage is that these private funds will often lower your monthly payments. However once we consider the interest cost and the lender fees charged for a private mortgage, your true cost of borrowing can be similar to your existing consumer debt. On paper lowering your payments can be a good solution, however if you do not have a plan in place to refinance your home with a mainline lender to repay these funds or have a strong alternative repayment plan in place you could find yourself in a perpetual cycle of high interest and payments that is very tough to get out of. In many cases my advice to clients is to consider the cost of private lending and if it is too great and if they do not have a secure exit strategy in place, to instead sell their home and repay their debts in full and then start again with a clean slate.
• Typical interest rates range from 8%- 22% with lending fees ranging from 2% to 10% depending upon your amount of money borrowed, loan to value, and overall risk

Lending for projects:

• Private, project based lending can lead to excellent win / win opportunities for both the lender and our clients. We actively work with many home builder and investor clients with this type of financing.
• Typical private mortgage projects include: builder mortgages, renovation mortgages for flipping houses, short term investment property acquisition, and financing for condominium conversions. These are great private lending opportunities as there is a plan in place for repayment of the funds within a specified period of time.
• Typical interest rates range from 8% to 12% with lending fees from 2% to 4%.

We work very closely with our clients who are considering private financing to ensure they understand all of the advantages and potential disadvantages of obtaining private funding. It is very important that you have an experienced mortgage professional who will honestly explain all areas of your private funding to you as it can be very easy to get hurt with private financing.

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Mortgage Default Insurance (CMHC, Genworth, Canada Guaranty)

How the underwriting process works:

Within the Canadian mortgage industry almost all mortgages for client purchases where clients have less than 20% down payment are insured against default for the lenders by one of the major mortgage insurers. The mortgage insurers are CMHC, Genworth, and Canada Guaranty. As a purchaser, which insurer insures your mortgage generally doesn’t matter to you as they all have the same premium charges and are really second and third looks at each other. The insurers do have a couple of unique programs and some have more common sense decision making processes than others but from a purchaser’s perspective, rarely do you become involved in the insurance process.

How the system works is from the broker channel we put together our client’s mortgage and submit it to the lender for approval. For this example lets say we submit to TD bank. TD underwrites and approves your mortgage then they see that you have less than 20% down payment and as such they submit to a mortgage insurer for insurance approval. Lets say they submit to CMHC and CMHC reviews your approval and has an issue with one of your mortgage building blocks (down payment, credit, income, or your new home value or condition of the home) and they decline your approval. CMHC then sends the decline back to TD and although TD has approved you internally it does not matter as they require the CMHC insurance in order to lend so in turn TD also has to decline you. Behind the scenes the Canadian mortgage system is very standardized as all of the banks and trust companies must abide by the insurer guidelines in order to approve your mortgage with less than 20% down payment.

With our above example TD has declined us due to CMHC’s decision, you would receive the same decline answer from any bank or trust company that you approached who went to CMHC as the system is standardized for all lenders.

Currently most banks send to CMHC as their default and in many cases will not send to any other insurers once they receive a decline from CMHC. As brokers we are able to add value to our clients as we have the option of sending to other lenders on your behalf to receive a potential approval from one of the other two mortgage insurers.

Mortgage Insurance Pricing:

Once we receive your mortgage insurance approval, the lender essentially has no risk in approving your mortgage as they are fully insured. This is why within Canada we are able to offer our clients the same rates regardless of the down payment amount.

The insurer will add an insurance premium onto your mortgage on a tiered basis as follows:

90.1% – 95% loan to value: 2.75%

85.1% – 90% loan to value: 2.00%

80.1% – 85% loan to value: 1.75%

For example if you had a $200 000 mortgage at 95% loan to value, after the insurance premium of 2.75% of your mortgage amount is added you would end up with a mortgage of $205 500.

Why do Mortgage Rates Change?

Fixed rates change in response to a change in the bond market:

We hear in the news “rates are going up/ rates are going down”, where do Canadian fixed mortgage rates really come from?

Good Question, contrary to popular belief, when the Bank of Canada meets and increases or decreases the prime lending rate this does not have a direct effect on fixed rates, rather only on variable rates. So what affects Canadian fixed mortgage rates? – the Canadian bond market. As bonds move up and down so do Canadian fixed mortgage rates. From the discounted mortgage brokerage channels, lenders typically aim for a spread above the bond (their gross profit margin) of 1.4% to 1.8%.

For example, a bond rate of 2.15% should yield a five year fixed rate in the 3.65% – 3.95% range.

How can you benefit from this knowledge?

By know and tracking the bond rate we should be able to predict upcoming Canadian fixed mortgage rate changes and in turn capitalize through either examining locking in our variable rate mortgages or securing a pre-approval at a low rate for a future purchase.

Do banks always follow this rule when determining Canadian fixed mortgage rate changes?

In principal the lenders follow this, the profit margins that lenders will aim for is principally 1.4%, however in a competitive spring market we have seen lender spreads as low as 1.2% and at other times of the year the spread has been over 2%. There are times when I have a conversation with my clients that goes along the lines of “Your new fixed rate mortgage should be lower based upon the bond rates however right now all of the lenders are taking a larger profit, if this changes prior to funding I will make sure you receive the benefit of the decrease but there is no guaranty that lenders will drop the rates in spite of the bond decreasing.”

Variable rates change in response to changes in the bank of Canada prime rate:

The bank of Canada meets eight times per year, two months on and one month off, at these meetings there can be an announcement of a change in the prime rate.

Why would the prime change?

Prime rate is one of the easiest ways for the Bank of Canada to stimulate the economy (lowering rates) or slow down the economy (raising rates). As well, it is also a great way for the government to raise and lower the value of the Canadian dollar relative to the American. An increase in prime will often result in an increase in the value of the Canadian dollar. With this in mind, the general fiscal policy of the government typically calls for a lower Canadian dollar. The Canadian dollar at $0.75 of the USD isn’t great when we travel to Disneyland however it is great for the manufacturing sector and Canadian exports as Canadian goods are relatively less expensive for similar quality and are therefore much more desirable. This stimulation to the exporting and manufacturing sector in turn is much better for the overall Canadian economy.

In short we are often able to predict future potential changes for our variable rate clients in light of the Canadian and American economies along with economic outlooks and reports from the Bank of Canada.

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The Unique

Acreage Mortgages

Acreage mortgage financing options can vary substantially by region. I have included the general lender offerings along with some regional specialties below. Even when we discuss general lending guidelines, they also vary quite a bit from lender to lender.

Over the years we have had the pleasure to work with many clients who have approached their bank about purchasing a new acreage only to find out that their bank typically doesn’t love financing acreages and will put up various road blocks along the way to try and either reduce their approval amount or not approve their mortgage at all.

The general guidelines:

• Banks will typically finance your new acreage home, plus a detached garage and between 5 acres and 10 acres.
• Banks will typically not finance acreages that have agricultural zoning and activity
• Banks will not finance your outbuildings such as shops, large sheds, and extra garages or barns

If you are purchasing a 2-5 acre home that is zoned country residential, your mortgage approval should be fairly easy and we will ensure that you receive excellent rates and terms.

The two biggest stumbling points that you will typically find are:

The bank will only finance the value of your home plus five to ten acres of land:

• For example, this can become a challenge when you are purchasing an home with 30 acres and have 20% down payment. If we assume your home value is $300 000 and your per acre value is $10 000, this would yield a $600 000 purchase price. In the case of a lender who will only lend on a home plus 5 acres, they will use a $350 000 value and lend on 80% of that. This would result in a dramatic increase in your down payment required. In the above example if you have budgeted 20% down payment for your $600 000 purchase, you were planning on a down payment of $120 000. Unfortunately this down payment requirement almost triples up to $320 000 with a house plus 5 acre lending policy.

 

The bank will only finance your home if it is zoned country residential and will not consider an acreage that has an agricultural zoning:

• It is true that most lenders will not lend on farm land that is actively being farmed. The reason for this dates back to the foreclosure laws that were enacted during the depression and extend some significant protections to farmers and are not favourable to mortgage lenders. If you have an active farm that you would like to finance your best first option is typically Farm Credit Canada. If you have an acreage that you do not actively farm but your zoning is agricultural and you have 30 to 160 acres, often it can be quite challenging to have most of the major lenders lend on your home due to their fear of potential farming operations.

The good news is that within certain Canadian regions, we do have mortgage lending solutions:

Our first solution solves the house plus 5 or 10 acre valuation issue:

• We do have lenders that will consider valuing your acreage based upon your home plus up to 160 acres. The loan to value can be up to 80% however we have an internal sliding loan to value scale based upon your proximity to the nearest town or urban centre, the closer we are to a major centre the closer to 80% loan to value we will often receive.

Our second solution solves our agricultural zoning issue:

• Depending upon your region, we are able to approve your mortgage with an agricultural zoning with the following conditions: We are able to use your home plus a detached garage in your valuation, as with almost all lenders additional outbuildings are not considered in the valuation. We can lend on up to 160 acres of value provided you do not have an active commercial farming operation, when we complete the appraisal if the number and type of outbuildings indicate commercial farming activity unfortunately we will not be able to lend. However if you are financing your acreage and you have 20, 30, 100 acres of land that is not being commercially farmed then we can have great lending options for you.

We work closely with many acreage and rural clients. This is definitely a unique lending speciality and can also be regional in nature. It is important that you work with a mortgage professional with the proper expertise to ensure you receive the best mortgage to fit your goals.

 

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Flexible down payment mortgages:

 

The 5% borrowed down payment (zero down):

 

The government of Canada through CMHC requires all purchasers in Canada to have a minimum of 5% of their purchase price for down payment. We do have some flexibility as to how we obtain your required 5% down. The insurers allow us to borrow your down payment from an unsecured line of credit for your down payment for your new home.

This is called the Flex down payment mortgage. There are only a handful of lenders remaining in Canada who participate within this program however if we fit we are able to help you purchase your new home with no down payment from your own funds and obtain best rates and terms for you in the process. The approval for this mortgage is a two step process where we obtain both an unsecured line of credit with interest only payments for our clients and then obtain their mortgage approval and use the unsecured line of credit for the 5% down payment.

The underwriting for this product is very similar to a normal 5% down purchase however the insurers are more particular on credit, income strength, and the strength of our overall application.

The gifted down payment:

As previously discussed the insurers require 5% down payment, one of the most flexible options that we have to obtain this down payment if you do not have it from your own savings is from a family gift. It is very common for families to give each other down payment funds to purchase a new home. The process is simple, we just have the immediate family member who is gifting the funds sign a templated gift letter and then we obtain a copy of our client’s bank statement showing that the funds for down payment have been deposited.

The gifted equity down payment:

We have had clients who are purchasing a home from a family member and instead of the family member selling them the home at full price, they sell them the home at a reduced price and “gift” them the remaining equity. With some lenders we are able to use the gifted equity as down payment. In many cases this can save our clients thousands of dollars of CMHC insurance premium.

For example:

Our client’s new home that they are purchasing is worth $400 000, the family member who currently owns it agrees to sell the home at $315 000, and our purchaser has $20 000 down payment. If we completed this purchase at $315 000 with $20 000 down payment, our client would receive best rates and terms however as they only have 5% down payment they would have an additional CMHC insurance cost of $8112.50 added to the mortgage. However if we complete the purchase at $400 000 with $85 000 of gifted equity and $20 000 cash our client would receive the same best rates and terms but would not have to pay the insurance premium and would save over $8000.

By working with a mortgage professional who understands how to work with these lender programs and use them to your advantage you can save thousands of dollars.

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Jumbo mortgages

 

For the information below, we are assuming that your down payment is at least 20% for your purchase. In 2012 the government of Canada removed the mortgage insurers ability to approve mortgages with less than 20% down payment for purchases of 1 million or more. As a result of this change your minimum down payment for homes over 1 million is 20% of your purchase price.

Lets first describe what a Jumbo mortgage is and why clients sometimes experience challenges:

A jumbo mortgage is generally a mortgage over $960 000 for a home with a value over $1.2 million. The issue that clients run into for home purchases over 1.2 million is that lenders institute what is called a sliding scale. The sliding scale is in place for almost all major Canadian banks, how is works is that most banks will approve up to 80% of the first $1 million of your purchase price and then 50% of the remainder. Lets look at an example to see how this affects our jumbo loan clients:

Assuming we have a client purchasing a home for $1.7 million dollars. Based upon an standard budget, 20% down payment for our client is $340 000 – with a mortgage amount of $1 360 000, and 25% down is $425 000 – with a mortgage amount of $1 275 000.

However based upon a normal lender sliding scale of 80% loan to value of the first $1 million of purchase price and 50% of the remainder, the down payment requirement jumps to $550 000 as the loan amount decreases to $1 150 000

As a result of the sliding scale you have an effective loan to value of under 68% and an increased minimum down payment requirement of between $125 000 and $210 000.

As you can see above, the typical lender sliding scale for jumbo mortgages is very punitive and can result in you paying hundreds of thousands of extra down payment to purchase your home.

We do have some strong jumbo mortgage solutions:

• We have many years of experience in working with clients who are obtaining larger than average mortgages. This experience allows us to understand how Canadian lenders think and operate along with which lenders are more likely to grant the exceptions that we require.
• We understand how to package your mortgage in the most attractive way possible to obtain a higher mortgage amount
• We fund millions of dollars of mortgages per year with our lending partners and use that relationship as leverage to your advantage.

Our typical success rate for clients who are purchasing homes in the $1.3 million to $2 million range is achieving a loan to value of just over or just under 75%, with best rates and terms. This is a significant increase above the 68% loan to value average offered by most Canadian banks. In the above example, this is a difference in down payment amount to you of an additional $119 000 that you do not have to pay for down payment. We work with our jumbo loan clients to understand your goals and ensure we do our utmost to help you achieve them.

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Credit impaired mortgage options

 

To understand the options for clients with past credit challenges we must look back to our original mortgage building blocks of down payment (equity in the case of a refinance), credit, and income. For clients where credit is not as strong we either need to strengthen our application with down payment or income and income from an outside source.

 

Adding down payment strength:

 

If our client’s credit is not able to be approved by traditional banks and trust companies but we have strong down payment and reasonable income, we are able to work with a couple of lenders who specialize in helping approve clients with past credit challenges. Depending upon the credit challenge, the down payment or equity required is typically between 20% and 30%. With this specialized option we are often able to offer shorter two to three year terms along with mortgage rates that are a bit above the very best but still good. This allows our clients to finance their home with good interest rates while we work with them to reestablish their credit so once their mortgage comes for renewal in two to three years we are able to move their mortgage back to a more traditional lender and offer them best rates and terms.

 

Adding income and credit strength:

 

If adding additional strong down payment is not a preferred option we are instead able to strengthen your application by adding a family member as a strong cosigner. A strong cosigner is someone who has relatively strong income, limited personal debt, and an average to good credit score and history. Adding a strong cosigner can allow us to proceed with your approval with as little as 5% down payment.

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Renovation Mortgages

 

Renovation mortgage options in Canada can vary dramatically from lender to lender and from client to client depending upon your renovation budget, current equity position, and current credit and income. We have many years of experience in working with our clients to ensure they have the best renovation mortgage options and that their transaction works beautifully.

There are two different renovation mortgage options:

 

Secured line of credit option (HELOC):

• This option is a great fit for clients who have strong equity positions in their homes as it allows them to access funds via cheque, debit card, or online money transfer at their sole discretion. For example if your contractor completes their work and asks for a $25 000 payment, you simply write him a cheque from your line of credit account and your are all set.
• The disadvantage to this structure is that it is only a fit for clients who have an existing strong equity position. The government of Canada limits secured line of credit lending to 65% of your home value, and overall mortgage lending for refinances to 80% of your home value.
• If we Lets look at an example and assume a $200 000 renovation:
• if you have a home worth $500 000 and do not have any current mortgage or line of credit on your home, we could approve a line of credit for you up to $325 000. With this line of credit you only pay for the money that you use, you have the benefit of low interest only payments, can draw the funds as described above, and can repay it at anytime without restriction.
• Your monthly interest only payments if you drew the full $200 000 would only be ~$584.
• A very important item to note: DO NOT START YOUR RENOVATION UNTIL THIS FINANCING IS APPROVED AND FUNDED. With this type of lending facility your home must be 98% complete at the time of funding.

If you have already started the renovation or do not have enough current equity in your home then the next option is your best choice.

Draw mortgage option:

• This renovation mortgage option is a great fit for clients who have already started a renovation or do not have enough equity in their home to access sufficient funds to cover the cost of their renovation up front.
• With this structure we would complete an appraisal to determine your current home value and also the “as improved home value”. Once this is complete we would schedule your initial funding amount along with typically two future draws.
• Lets look at the same example as above, assuming a $200 000 renovation:
• Our client has a home worth $500 000 and currently owes $300 000. The after renovation home value is $700 000 as per the appraisal. With this being the case we would approve a total mortgage of $500 000, with an initial draw amount of $400 000 (80% of the current value) and two subsequent $50 000 draws to be paid at predetermined stages of renovation completion. With this structure you receive $100 000 up front and two additional $50 000 draws to cover their entire $200 000 renovation.
• This structure is not available as a line of credit, rather it is completed as a mortgage with good rates and terms.

Renovation mortgages are a unique mortgage that requires your mortgage professional to understand your goals, budgets, and construction time lines in order to ensure you receive the amount of funding you require when you require it. I would always recommend that you ensure your mortgage professional is experienced in this type of financing before having them proceed with your application.

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Purchase plus improvements

We regularly receive calls from clients who have found their new home, the right location, floor plan, and neighbourhood, but cosmetically the inside of the home looks like a bad trip back to the 80’s, or worse – the 60’s. This is a case where we would often suggest our clients proceed with a purchase plus improvements mortgage. There are some definite misconceptions surrounding this program so I have included below the process to obtaining a purchase plus improvement approval along with some common misconceptions and mistakes that people make.

The process:

Once you find your new home and enter into a purchase agreement we typically have what is called a financing condition period. Within this time frame of usually about a week we look after the completion of your mortgage approval, however with your purchase plus improvements there are a couple of extra steps. The first step is to determine your improvements and receive a contractor quote for them. Once we receive your quote we add the quote amount to your purchase price and submit to the lender and insurer (if applicable) for their approval.

For example:

You have a purchase price of $300 000, a down payment of 5%, and improvements of $20 000. To the lender and insurer this becomes a purchase price of $320 000 and your down payment increases from $15 000 to $16 000. At funding the seller receives the $300 000 purchase price owed to them and the lawyer holds back the improvement funds until your work is complete and inspected. This is the biggest misconception with this type of mortgage, the lender will not pay for your improvements, rather they will reimburse you once the improvements are complete.

This is a bit of a changing list but generally these are items you can include in your improvements:

• Kitchen and bathroom renovations
• Flooring
• Windows
• New roofing
• Paint
• Garage construction

Items that you are not able to include are non- attached goods and items that are deemed to not add value such as:

• Appliances
• Window coverings
• Landscaping
• Fencing

Some common misconceptions and helpful hints:

• As we discussed earlier, the lender will not pay for your improvements, rather you are reimbursed once they are complete.
• Lenders require the contractor quotes up front. With this in mind it is important to ensure the contractor is lined up and able to access the property during the condition period.
• There is only one draw available. For example if you are replacing a furnace and the kitchen cabinets and the furnace takes a couple of hours and the cabinets a couple of weeks, reimbursement will not happen until all items are complete. With this in mind, it is often best to schedule all items to be complete at about the same time.
• This program is designed for improvements, not major renovations. The maximum improvement amount is 10% of your purchase price and usually about $30 000 to $40 000. It generally cannot include any major construction such as the movement or removal of walls and other structural changes.
• You start to pay interest on the improvement money on your possession date. At closing, the entire amount of the funds are advanced to the lawyer and he completes a hold back of your improvement funds.

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Secured lines of credits

 

A secured line of credit or HELOC is a re-advanceable mortgage product that is an alternative option to a traditional mortgage for your home financing. Currently the government of Canada limits new lines of credit to 65% of the value of your home. For clients that require 80% loan to value many lenders are able to approve a line of credit to 65% of the value of your home and then a fixed or variable mortgage for the remaining 15% of your financing amount in order to achieve a total lending amount of 80%. These products are not available for mortgages where clients require more than 80% loan to value financing or insured mortgages. As with all mortgage products there are positives and negatives to consider when you are deciding if a secured line of credit is a good fit for you.

The positives:

• Your funds are re-advanceable meaning you are able to borrow a predetermined available amount as required, when you no longer require the funds you are able to repay them anytime without penalty or restriction.
• You only pay interest on the funds you use.
• Your payments are interest only and do not include any principal payments, this results in lower monthly minimum payments and gives you added creativity in managing your personal cash flow.
• You are able to repay your funds owing at any time and any amount without restriction.

The negatives:

• You are charged a higher interest rate compared to a variable rate mortgage in exchange for the flexibility you are afforded with this product.
• There is no preset principal repayment so additional discipline and planning is required to repay the mortgage.

All in one banking:

There are several all in one lending products that are very well marketed including the Manulife One, that when used strategically can yield good results for you. However when it is not used strategically the end result is the lender making a lot of money (and you not).

Within the all in one banking and mortgage/ line of credit product, the Manulife One is the most well marketed however almost all of the major banks have a similar product, with their various functionalities differing lender by lender. In fact, when we are working with our clients and taking an objective view, based upon product options, pricing, and flexibility, the Manulife One is in a close race for the second or third best option in Canada. I have included below a case study in the all in one banking and mortgage/ line of credit product that outlines some of the advantages and also some potentially better alternatives to the all in one.

The “All In One” case study – and a better alternative:

Most clients who obtain the all in one product simply replace their mortgage with a secured line of credit, add in all of their debts to lower their cost of borrowing, and then start using the product as their daily bank account because regular deposits result in less interest being paid. Lets look at a case study to see what the true benefit is of this product and some potential alternatives:

All in one banking option:

• Lets assume we have a home Value of $465 000, mortgage amount of $250 000 at 3.5%, credit cards of $25 000 at 18%, and a vehicle loan of $25 000 at 4.0%. = Total debt of $300 000.

Manulife or another all in one lender will put this $300 000 into a line of credit at “Manulife One Prime” which is actually bank prime +.5%, currently 3.5%. The thought is we lower the cost of borrowing and payment amounts on the higher interest debt and reduce it from 18% to 3.5% and then use those extra funds that you are currently paying these credit cards and loans to instead pay off your mortgage faster. Additionally the lender has you putting all of your personal savings and extra monthly funds into your line of credit to repay it faster. This is a great concept in theory however we have had more clients experience the exact opposite results – yes they will consolidate their debts and lower their cost of borrowing, however very few clients meet the “manulife number” calculation as life happens and they choose not to put all of their excess savings into repaying this line of credit. The end result of this is you are left with a product that you pay interest only on, you never repay, have perpetual debt AND Manulife is charging you a higher rate than you could be paying.

The alternative strategy to all in one banking:

Using the same above example, we can take the consolidated debt amount of $300 000 and place it in a mortgage at prime -.4, currently 2.6%, the results of this are two fold. The first is you are regularly paying both principal and interest thereby repaying your mortgage consistently. The second is you are saving $2700 in simple interest per year based upon your reduced rate from the Manulife one rate of 3.5% to the variable mortgage rate of 2.6%. This is an extra $13 500 you are paying over five years to Manulife for their line of credit product when in many cases it is not the best fit for our clients. We do have some clients who would still like a line of credit for future investment and contingency reasons, for these clients we can absolutely add a line of credit to this mortgage product. In this case we would approve a mortgage at prime -.4 for $300 000 and a line of credit at prime +.5 for $72 000, if the line of credit is never used there are no costs or fees and you only pay for the funds you access.

Based upon numerous client experiences and numerical data it is clear that there are many good uses for a secured line of credit. Unfortunately for most clients, when they obtain a line of credit it is not the best product fit for them and it costs them thousands of extra dollars per year in interest. When you are considering selecting a secured line of credit or an all in one banking account it is important that you consult a knowledgeable and trustworthy mortgage professional who is able to clearly explain the advantages to you of your various options.

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Divorce Mortgages

With our variety of lender options and policies we are able to help our clients who are divorcing with a couple of unique programs and strategies.

The first area of unique assistance we are able to offer is for your down payment:

The government of Canada has set guidelines for lenders to allow a maximum refinance of only 80% of the value of your home. However, in the case of divorce mortgages the government has allowed special guidelines to help you.

Unfortunately in many divorce situations, if we are limited to an 80% loan to value refinance, the home does not have enough equity to equally repay one party their part of the home equity while allowing the other to keep the equity and remain in the home. For example, assuming the divorcing couple has no other assets to deal with, their home would have to have a loan to value of 60% or less in order to split the equity equally. In real numbers, if they had a $300 000 home, their current mortgage would have to be $180 000 or less in order to allow the clients an equitable split. In this case the client who is keeping the home would retain the $60 000 in equity and would then obtain a new mortgage for $240 000 in order to repay the other party the $60 000 in cash.

The good news is we have a unique solution and exemption from the government backed mortgage insurers to treat divorce mortgages and buyouts as purchases. By treating these mortgages as purchases instead of refinances we are able to approve our divorce mortgage clients under the same requirements as if they were purchasing the home from the previous spouse. More specifically, this special exemption allows us to use the home equity they receive in the separation as the down payment. As a result of this unique program, for divorce mortgages in Canada we are able to use as little as 5% down payment in the form of home equity for the home buyout. For example assuming our clients own a $300 000 home and they have a mortgage of $270 000, with $30 000 in total equity. We are able to use the split of that equity: $15 000 for the down payment for the person who is keeping the house, while the other party receives the $15 000 in cash as a buyout through the new mortgage financing.

The second area of unique assistance we are able to offer is in helping you qualify for a larger new mortgage if you have support payments through the Income deduction strategy:

The traditional method of determining the size of a mortgage a client can qualify for relies predominantly upon a calculation called Total Debt Service or TDS. This number is a measure of all of your new home payments in addition to other debt payments relative to your gross personal income. For example if a client has a monthly gross income of $6000 and monthly debt obligations of $2000, their TDS is 2000/6000 = 33%. The government through CMHC allows clients to have a TDS of up to 42% to 44%. As you can see if a client adds a monthly support payment of $1000 to their TDS, their debt ratio would be 3000/6000 = 50% and they would be well over the maximum allowable and would not qualify.

So, how do we fix this qualifying challenge when we are funding post divorce mortgages for our clients? Through several of our lending relationships we are able to turn the tables in our clients’ favour through using a lender exception when we calculate your TDS. Instead of us counting the support payments as a debt, we are able to deduct them from your income. This makes a very big difference in terms of how much mortgage you are able to qualify for.

For example:

In the above scenario of $6000 in monthly income and $2000 in debt obligations, an addition of $1000 in support payment will move the TDS from qualifying for a mortgage at 33% to not having a chance at qualifying for a mortgage at 50% TDS. However if instead we turn the tables and use the income deduction strategy to deduct the support payments from your income our debt ratio becomes 40% and we easily qualify.

This benefit is easily seen when we look at how much more mortgage you are able to qualify for if we use the income deduction strategy. In the above example when support was considered a liability, you would qualify for a $250 000 mortgage. However, when we use the income deduction strategy, you would qualify for a $300 000 mortgage. This is a difference of $50 000 in the amount of a home your can purchase for your family.

We have had many years of experience working with divorced mortgage clients and understand your unique needs and also which lenders have policies that are favourable to your situation.

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Second home and recreational property mortgages

Lenders within Canada can vary in their interpretation of what constitutes a second home and how they underwrite and approve them. As a general rule second homes typically fall into three unique categories:

 

• Recreational home for you and your family

• Home for your children to live in while they are attending post secondary education

• Home for your elderly parents

How to buy a second home:

Once we determine the category that your second home fits into the next question is the amount of down payment you were planning on:

• 5-10% down payment for your second home, or

• 20% down payment or more

With both options, mortgage rates and terms will typically be identical, with the only difference being with less than 20% down payment we will have to obtain CMHC insurance. As it relates to your income, with a second home the qualifying is very similar to a normal mortgage qualification except we will have to approve your new mortgage while still factoring in your existing debts including current home debts.

 

The biggest typical challenge that we encounter when approving your second home mortgage is that no rental income can be used to qualify for the second home. This means that your income will have to be strong enough to cover your current home, all of your other debts, and your new home payments within the CMHC or lender required debt servicing guidelines.

 

Some common client questions include:

 

• Can I purchase a rental home as a second home or use any vacation rental income to qualify for my mortgage? Unfortunately one of the main conditions of a second home mortgage is that it is not being used to purchase a rental property and as such we cannot include any rental income.
• Am I able to purchase a second home in the city that I live in for my elderly parent or child attending school?

This is an interesting question, with 20% or greater down payment, the answer is yes, with less than 20% down payment the answer is also yes but CMHC will often ask for us to add the parent or child to the mortgage to confirm that it is a home for them and not a rental property. If you are purchasing in another city for the same purpose CMHC will often not require your parent or child to be added.

• Am I able to obtain a mortgage for a vacation home that has fractional ownership, a hotel structured rental option or a mandatory rental pool?

Unfortunately lenders in Canada generally do not offer mortgages for these types of ownership structures.

• Am I able to purchase a seasonal access second home within this program?

Yes, through one of the mortgage insurers we are able to approve seasonal access homes, depending upon the home and the access to it the minimum down payment can vary.

 

We have many year of experience in working with our clients and ensure we understand and work with you to meet your vacation home or second home goals. A mortgage prepared and presented properly for your second home can mean the difference between your approval and decline for these specialized mortgages.

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New Immigrant Mortgages – work visas, permanent residents, foreign investors

 

There are very good mortgage options in Canada for new immigrants and other people who are not originally from Canada and would like to buy a home. The options are good and fit most clients very well, however the requirements imposed upon the lenders by the government or by the lenders themselves can be quite rigid. Due to the fairly strict nature of the requirements we always try to work with our clients in advance to ensure we have all required items in place before they purchase their new home. By completing this addition due diligence in advance we ensure our clients an excellent and smooth new to Canada mortgage. With all of the below options, lenders typically offer best rates and terms.

 

There are several unique categories of clients who are purchasing new homes in Canada and fit within the new immigrant programs:

 

Owner occupied home purchase with less than 20% down payment:

 

Minimum Down payment required:

The down payment for your new home will vary depending upon whether you have obtained your permanent residency or are residing in Canada with a work visa.

 

• Permanent residency (PR): 5% down payment of your purchase price

• Work visa (WV): 10% down payment of purchase price

• Down payment source must be from your own personal savings or investments

 

Credit requirements:

If you do not have established Canadian credit we are able to use the following documentation to demonstrate your credit strength. If you have moved to Canada within the past two or three years and have established strong Canadian credit we are able to use your Canadian credit instead.

 

• 12 months of bank statements from a Canadian bank account showing regular rental payments and one other payment (utilities, phone, insurance) (PR) (5% down payment)

OR

• 6 months of bank statements from a Canadian bank account showing regular rental payments and one other payment (utilities, phone, insurance) (PR)(10% down payment)

OR

• Credit bureau report from your country of origin (5% down payment PR) (10% down payment WV)

OR

• Bank reference letter from your country of origin (5% down payment PR) (10% down payment WV)

Income requirements:

 

• Employment letter confirming your position is permanent and your income amount

• A recent pay stub

 

Owner occupied home with more than 20% down payment:

There is a bit of a gap in the Canadian mortgage market for purchasers who are newer to Canada but do not have established Canadian credit. If you are new to Canada and do not have a foreign credit bureau or established Canadian credit, generally speaking lenders offer more flexible credit exceptions and programs with 35% down payment. If you have a foreign credit bureau or have established Canadian credit 20% down payment can be an option. The income requirements are generally similar to the 5% and 10% down payment programs.

 

Non resident clients who are purchasing a Canadian property:

When we work with non- resident clients to purchase property in Canada, our clients usually purchase a home for one of the following reasons:

• Rental or investment property

• Recreational property or vacation home

• Home for a home for a family memberwho is attending school in Canada

 

The Canadian lender requirements are very similar for all three of the above purposes:

 

• Down payment of 35% required
• Full disclosure of your income and assets held in your current country
• Credit bureau from your current country, if this is not available we are able to use a bank reference letter

 

The lending options for people who are new to Canada, have not yet established Canadian credit, or are purchasing a property in Canada for investment are very strong and offer great rates and terms. The lending options and requirements can be quite rigid and at the same time expansive, it is important that you have an excellent and knowledgeable person and resource to guide you.

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The Specialized

 

Revenue property mortgages

The investment and rental property mortgage landscape in Canada is interesting to say the least, frustrating and inconsistent to say more, and yet still very good and healthy to say the most. Obtaining an investment and rental property mortgage in Canada can be a very positive, clear, and excellent experience if you understand the underlying fundamentals that banks and trust companies are now using for your approval along with having someone with a strong investment and rental property mortgage background to help guide you. Rental property mortgages in Canada require between 20% and 25% down payment depending upon the lender. Some lenders allow a portion of your down payment to be gifted funds from your family. The biggest change in this lending field that we have seen in the past couple of years is the decrease in the number of lenders who are willing to lend for clients who have multiple investment and rental property mortgages.

For clients purchasing their first investment property it tends to be a relatively straightforward process, for these clients we are able to ensure their investment and rental property mortgage is put together quickly, clearly, and with excellent rates and terms. The second group of clients, namely the ones who own multiple rental properties and are sometimes referred to as “sophisticated investors” are the ones who have experienced the largest changes in how lenders view them and underwrite their mortgage approvals.

Investment and rental property mortgage structuring for sophisticated investors:

The lending field for our sophisticated investor clients used to be plentiful with lenders who were willing to use strong rental offsets, debt coverage spreadsheets, and portfolio based underwriting techniques. Unfortunately for the investors who are now obtaining an investment and rental property mortgage these lending options have decreased substantially. However, the remaining lenders who cater to sophisticated investors can be a great fit for you if you are working with someone who has experience and knowledge in their underwriting techniques and options. There are four methods that lenders use to calculate the income and expenses from your rental properties in order to determine your mortgage approval qualification. As well, some lenders combine the various methods and will for example use the “rental add back method” for the property you are buying and then use the “tax return method” for your current rental portfolio.

• Rental add back method – This is the most punitive method that lenders use and unfortunately this is currently the method that most lenders are using. In this calculation lenders will usually use 50% of your gross annual rental income and add it to your personal income and then they will use 100% of your new property liability and add it to your liability column. The problem with this method is that within the debt servicing calculations liabilities count against you much more than income counts for you. For example if you have a rental property with $1200 rental income and $1000 liabilities a common sense person would agree that this home covers itself and it should not count against you. However in this example with the rental add back method, you will receive an increase in your annual income of $6000 however your monthly liabilities will also increase by $1000 and have the same negative qualifying effect as if you had a $33 000 balance on your credit card.
• Rental offset method – This used to be the most prevalent method used by lenders and now is one of the least common. It can be a very favourable calculation for our investor clients with most offset lenders using an 80% offset. If we go back to our previous example we would have a $1200 per month rent x 80% = $960 and then subtract our monthly property liabilities from this amount of $1000 to end up with a net minus $40 per month. This negative amount per month has a very minimal impact on your qualification and is the same as having a $1333 balance on your credit card.
• Debt coverage ratio method – This is the method that we use with many of our sophisticated investor clients as it tends to be very favourable for clients with larger strong rental portfolios. Lenders will often ask for a minimum debt coverage ratio (DCR) of between 1.1% and 1.3%. The DCR is calculated within a predetermined lender spreadsheet, however a simple way of describing it using our previous example would be to take our rent of $1200 and divide it by our liabilities of $1000. This would give us a DCR of 1.2. With this DCR the lender would consider the property or portfolio as self sustaining and would not count any of it within your qualification and approval numbers.
• Tax return method – this method is often combined with the Rental add back or Rental offset methods. The lender will often use the tax return for our clients’ current rental portfolio along with one of the other two methods for the property they are purchasing. With this method we review your last years personal tax T1 general with the statement of real estate rentals or your corporate financial equivalent to determine if your rental properties had a surplus or a loss. If they showed a surplus we often add it to your income and then consider the properties as covering themselves, if you have a loss we add it as a liability and then consider the properties as covering themselves. This can be an excellent method for our clients who have larger portfolios.

We have years of experience in working with clients who are purchasing their first investment property and their fiftieth rental. One of the most important assets you can have in effectively growing your rental portfolio is a mortgage professional who understands how to structure, package, and present your new investment property and current portfolio to the right lender.

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Self employed mortgages

 

As we discussed in the “building blocks of your mortgage” section, mortgages are made up of a sum of our down payment, credit, and income. In the case of many self employed clients, they have the flexibility to show less personal income in lieu of their write offs in the case of a sole proprietor, and retained earnings in the case of a corporation. For self employed mortgage lending in Canada, many lenders have specialized and unique programs that allow for more flexible income underwriting in lieu of stronger down payment and good credit.

The government, through their bill called B-20, has made changes that lenders have since implemented that place much stronger restrictions upon how lenders determine reasonable income for self employed clients. The below options are assuming we do not fit the “traditional income ratios” discussed previously. Prior to the government changes we would often confirm that our clients were self employed and the length of their self employment. After that we would use a “reasonable” income based upon their industry and proceed with their approval. This methodology has since changed, I have included below the current flexible self employed mortgage options.

Insured mortgage option with as little at 10% down payment:

• Through CMHC the government has a lending program that allows some lenders to state a reasonable self employed income for clients who do not fit the traditional requirement for two years of self employed tenure. This program is typically computer adjudicated based upon income models and these models determine if the self employed income we use for you is reasonable. It can be a bit hit and miss however we do our best to build our case to ensure your approval.
• Through Canada Guaranty and Genworth we also have program where we are able to state a reasonable income for our clients with the difference being these two insurers require two years of self employed history where as CMHC does not. The other advantage to this program is we tend to receive more common sense underwriting where the insurers will use your company financial statements to determine your actual income.
• The minimum down payment is 10% from your own savings or investments , we do receive best rates and terms however the disadvantage is that the insurers increase their insurance premiums for this program. The insurance increases from 2.0% with a traditional income verified mortgage to 4.75% due to the flexible nature of our income. This program is also available with 15% down payment with a reduced insurance premium of 2.9%

The bundle mortgage option with 15% down payment:

• With this option we are able to combine a self employed specialized mortgage with a small private second mortgage to achieve an 85% loan to value mortgage.
• This is available for purchase and refinances but is typically limited to major urban centres
• The pricing for this product has a higher base rate than the 15% down payment insured mortgage above but typically only has a 1% fee versus a 2.9% fee
• This is a shorter term mortgage of usually one or two years after which time we work to transition our clients to an 80% loan to value mortgage with stronger rates and terms

The “behind the scenes” insured mortgage option with 20% down payment:

• Many of our trust company based lenders offer this self employed mortgage solution. They will often offer it with good rates that are a bit above best rates and terms.
• How the process works is the lender will approve your 20% down payment mortgage based upon similar guidelines to the “Genworth and Canada Guaranty insured mortgage option with 10% down payment” above. Once the lender approves it they submit it to the insurer for their approval, typically as the down payment is increased the insurer has a bit more approval ability than with 10% down payment. Once the insurer approves your mortgage the lender will issue an approval as well. The reason why I refer to this as the “behind the scenes” insured mortgage is the lender will not often add the insurance to your mortgage, rather they will increase your interest rate from best rates to good rates in proportion to the insurance amount that they are paying on your behalf.
• This product can be very helpful as there are often fewer area restrictions amd clients are typically not required to be based in a major urban centre.

The self employed specialized 20% down payment mortgage option:

• This is one of the more flexible self employed mortgage options in Canada. For qualification these specialized lenders follow a reasonability test for your income. The test includes two components: determining if your industry tenure and income makes sense, and then reviewing your most recent one to three months of personal or business bank statements. With these bank statements we will then add up your deposits to determine your annual income.
• For example if you have deposits of $4000 for January, $7000 for February, and $6000 for March, a three month average of $5666 would give us an annual income for you of $68 000. This is an advantage to our self employed clients as it uses your gross income and does not include any expenses or deductions.
• The pricing for this product is usually about 1% above best rates

The 35% down payment mortgage option:

• This option used to be quite prevalent with most lenders offering an equity based mortgage with best rates and terms at 65% loan to value. With the government instituting the B-20 guidelines that required enhanced due diligence for lenders in terms of income verification requirements most lenders cancelled their program.
• There are a couple of remaining lenders who have this program.
• The pricing for this product is typically best rates and terms.

A couple of additional self employed speciality lending notes:

• Some lenders will either reduce the loan to value or not provide financing on apartment condos with these programs.
• Many of these programs have maximum loan amounts ranging from $600 000 to $750 000. We are often successful in obtaining mortgage approval at higher amounts for our clients however lenders will often ask for additional business income confirmation to ensure there is a good lending fit.
• We have some lenders who will not ask for confirmation of your personal taxes being paid up to date

If you are self employed and are interested in purchasing a new home or refinancing your current home it is very important that you work with a broker who has the knowledge, experience, and lender relationships to ensure your mortgage is structured and presented properly. The structure and presentation can sometimes be the difference between being approved for your mortgage or being declined.

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Builder inventory mortgages

 

Many of our home builder clients have either larger commercial lines of credit to facilitate their home building expenses or obtain private builder financing or a combination of both. This creates a two fold challenge:

• With builders lines of credit the challenge is our home builder clients run out of money as they continue to build. For example if a home builder has a $5 000 000 line of credit and he starts five new homes a month, and his average land and build cost is $400 000, he will run out of money in two and a half months. With an average build time of eight months, this can create a definite cash flow challenge.
• With private builder mortgages, the challenge is that the cost for these funds is typically around 12% interest, so once the home is complete if the builder is still holding it, their profit margin decreases daily due to higher interest expenses.

Our solution for builder mortgages that allows our home builder clients to free up their operating line of credit or to repay their higher cost builder financing is to fund an inventory mortgage for them. These specific builder mortgages have:

• Limited personal qualification requirements – we often use your previous year’s net income from your financial statements or your interm financial statements for the past several months to determine income reasonability for the loan.
• Net 65% loan to value lending amount for our builders based upon the appraised value
• Fully open for repayment at any time without penalty or restriction
• Interest rates of 6.24% and a 2% lender fee added to the mortgage amount

Typically we see these builder mortgages fit our small to medium size home builder clients perfectly as it allows them to redistribute funds to either free up their current builder line of credit to facilitate ongoing building activities or to repay existing higher cost financing.

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How to keep your current home as a rental and buy a new home

We have many clients who have decided to buy a new home while at the same time keep their current home as a rental. Clients typically do this for a couple of reasons: their current home does not have sufficient equity to make it advantageous to sell, or they have decided that they would like to build a rental property portfolio as a part of their investment strategy.

In much the same way as lenders have very different guidelines for rental property qualification, they also have very different guidelines for keeping your home as a rental. Most of the Canadian banks will use the “rental add back method”, which tends to make qualification for our clients very challenging. The other method that we tend to employ for our clients is the “rental offset method”, this allows our clients much more purchasing power and greater options for their new home purchase. These are the two methods explained:

• Rental add back method – This is the most punitive method that lenders use and unfortunately this is currently the method that most lenders are using. The calculation for this lenders will usually use 50% of your gross annual rental income and add it to your personal income and then they will use 100% of your new property liability and add it to your liability column. The problem with this method is that within the debt servicing calculations liabilities count against you much more than income counts for you. For example if you have a rental property with $1200 rental income and $1000 liabilities a common sense person would agree that the home covers it self and it should not count against you. However in this example with the rental add back method, you will receive an increase in your annual income of $6000 however your liabilities will also increase by $1000 and have the same effect negative qualifying effect as if you had a $30 000 balance on your credit card.
• Rental offset method – This used to be the most prevalent method used by lenders and now is one of the least common. It can be a very favourable calculation for our clients, with most lenders using an 80% offset. If we go back to our previous example we would have a $1200 per month rent x 80% = $960 and then subtract our monthly property liabilities from this amount of $1000 to end up with a net minus $40 per month. This negative amount per month has a very minimal affect on your qualification and is the same as having a $1333 balance on your credit card.

I have included below an example to illustrate how we can help:

• Assuming you have an income of $60 000, home payments of $1200, and rental income of $1500.
• Based upon these rough numbers, to a common sense person your rental property covers its expenses and should not count against you – unfortunately the banks don’t see it this way.

With the “rental add back method” that most banks employ you would be qualified for a new mortgage of about $200 000. However based upon the “Rental offset method” we are able to approve you for a mortgage of around $300 000. This is a staggering difference , with an increase of 50% in mortgage approval amount and could make the difference between buying your new home and not.

When you are purchasing a new home and keeping your existing it is very important to ensure you have a mortgage professional working with you who is experienced, knowledgeable, and creative to ensure you receive the best mortgage fit for you and your family.

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What no one tells you (but could cost you – or save you – thousands of dollars)

 

Different pay out penalty calculations

On paper the penalties for early repayment of your mortgage look exactly the same from lender to lender, however this is unfortunately not the case and it could end up costing you thousands of dollars.

Payout penalties explained:

• For variable rate mortgages your pay out penalty is almost always three months of interest. For example if you have a $200 000 mortgage at 2.5%, your approximate pay out penalty would be calculated as $200 000 x 2.5% interest / 12 months to receive a monthly interest cost x 3 months interest = $1250.

• For fixed rate mortgages your penalty is almost always the greater of either three months of interest or the interest rate differential (IRD). The IRD is a measure of the money the lender is losing by you repaying your mortgage early versus what they are able to re-lend it at for your term remaining. For example If you have a $200 000 mortgage with an original five year term at 3.5% and you have two years remaining on your term and the current two year re-lending rate is 3.0% the calculation would be: $200 000 mortgage amount x (3.5%-3.0%) the difference in your current rate versus the re-lending rate x 2 years remaining on your term = $2000

So far this explanation seems pretty simple and straightforward, however the Canadian banks have a rather devious way of using this formula but changing the input numbers so your payout penalty with the IRD increases by thousands of dollars. Most Canadian trust companies use the true and accurate numbers so your penalty with them could be thousands less than the banks.

The difference in the calculation is that most trust companies will use their actual re-lending rate for the IRD where as the banks create a generally unrealistic rate by using what they call your “original discount off the posted rate”. For example:

• If we look back to our original example the trust company is re-lending two year mortgage money at 3.0% and your rate is 3.5% so they are legitimately losing 0.5% over the remaining two years of your mortgage and they will charge you for it – I think we can agree that this seems fair.

• The banks however will manipulate the re-lending rate by applying a discount off of the posted rate in order to receive a higher pay out penalty from you. For example, if we assume your five year fixed rate is 3.5% and the original bank posted rate at the time of your approval was 5.24%, then you received a discount off the posted rate of 1.74% (5.24%-3.5%). However these discounts vary and tend to increase when you select a longer term. A typical discount off the posted rate for a two year term is 0.35%, meaning that if the current two year lending rate is 3.0% then the two year posted rate is often 3.35%. Now this is where the bank calculation becomes unrealistic and can be very detrimental to you. When you pay out your mortgage the banks will apply your original discount you received off the posted rate against the current posted rate for your term remaining to determine the re-lending rate. In our above example this would mean that the bank would determine the two year re-lending rate as follows: 3.35% current two year posted rate – 1.74% your original discount off of posted = 1.61% current re-lending rate. Obviously this is not the bank’s true two year rate but is is the number that they will use to calculate your penalty for early repayment.

This part is very important and could save you thousands of dollars. With our above example and explanation, if you have a $200 000 mortgage with most trust companies and you are planning on paying it out early based upon the above numbers, your pay out penalty would be $2000. However with a bank mortgage based upon the above number your pay out penalty would be more than triple at $7560! Now lets look at these numbers if you had a $400 000 mortgage, your trust company penalty would be $4000 and your bank penalty would be a staggering $15 120!

As a mortgage professional we always seek to educate our clients and also protect our clients to ensure they receive the very best mortgage fit for their plans and goals.

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Fully closed mortgages

Some lenders will offer mortgages that are considered “fully closed for the term”. This typically means that during your mortgage term, unless you sell your home to a non- related third party, you are not able to repay your mortgage and in some cases move your mortgage to a new home. Sometimes you are able to refinance with the current lender who holds your fully closed mortgage however you are at their mercy in terms of pricing and loan amounts as they know you are not permitted to move your mortgage to any other lender.

These fully closed mortgages are typically offered by two different types of mortgages and lenders.

• The first type of lender that offers this mortgage is a non- conforming speciality lender. These lenders work with clients who have had past credit challenges or have challenges verifying their income in a traditional manner. To minimize the effect of the fully closed term and to protect our clients we typically approve a one or two year term with these lenders so that our clients have flexibility to modify their mortgage within a relatively short period of time.

• The second type of lender is much more dangerous and is typically hidden from most borrowers. These mortgages are offered by some major banks and trust companies. In exchange for clients signing onto a much more restrictive and potentially expensive mortgage for them long term, the lender will give them a further discounted rate. The discount is often about 0.1% below the current best rates offered for a normal mortgage. In our years of experience this is generally not a good fit for most clients however these extra restrictive terms are often not clearly explained by the banks and trust companies to the client during the approval process.

When you are in the process of obtaining a new mortgage, especially if you are either seeking the absolute lowest mortgage rate or if you are obtaining a mortgage from a lender that is overlooking some past credit challenges please ensure that you ask your mortgage professional to explain all of the terms and potential drawbacks of your mortgage.

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Inflationary Hedging

Inflationary hedging is one of our most effective strategies to help you repay your mortgage faster while at the same time protecting you against payment shock upon your mortgage renewal due to increased mortgage rates. We implement this strategy by gradually increasing your mortgage payments over four years of your five year term so when your mortgage is up for renewal your payments are the same as the projected renewal rate.

Lets look at a fixed rate example:

Our client has a $300 000 five year 3.0% fixed rate mortgage and we project a 5.0% renewal rate in five years. At the beginning of year two of the mortgage we will increase our client’s payments to reflect a rate of 3.5%, beginning of year three, 4.0%, year four 4.5% and at the beginning of year five we will be paying at a rate of 5.0%. It is important to note that our client is still being charged at 3.0% by the lender and we are using the pre-payment privileges on the mortgage to increase the payments.

Our client’s monthly payments will gradually increase by only $87 every year, from a starting payment of $1261 to an ending payment in year five of $1601. This small increase will however result in a significant benefit for our client. In addition to protecting their budgeting against a large payment increase at renewal, they will also repay an additional $10 477 toward their mortgage principal and will have reduced their remaining mortgage amortization by approximately two years.

This is a strategy that we will often employ even more aggressively with our variable mortgage clients. We will often approve a variable mortgage but work with our clients to set their payments at the current best five year fixed rate.

Lets look at a variable rate example:

If we have a variable rate mortgage at 2.5% and the current five year fixed rate is at 3.5% we will often set your payments at the 3.5% mortgage rate. This strategy has two major benefits to you, the first being we are guarding you against payment increases in the event of the prime rate rising. The second being that while there is a large difference in rate between the 2.5% variable you are being charged at and the 3.5% rate you are paying at, the extra payments you are making are repaying your mortgage faster and effectively reducing your remaining mortgage in some cases by years.

This is a strategy that we have worked with our clients on for many years and with great success, when you are choosing a mortgage professional to work with make sure to ask them questions about how they can develop strategies with you to help protect you against rate increases and also help you repay your mortgage faster.

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Renewing your mortgage

At renewal you have three options: renew your mortgage with your current lender, transfer your mortgage to a new lender, or complete a full restructuring of your mortgage by either accessing funds or doing a large principal repayment.

• Renewing your mortgage with your current lender: This can be hit and miss, some lenders offer very good mortgage rates for your renewal where as others offer rates that are quite a bit above the current market. I always do my best to work with our clients at renewal and let them know if the current renewal offer is a strong one for them or not.
• Transferring your mortgage to another lender: Other lenders are very aggressive in obtaining existing performing mortgages as they have minimal underwriting and legal costs – essentially the lender takes over ownership of your current mortgage through land titles. With transfers lenders generally pay all costs and fees and offer you excellent rates and terms. The only drawback is is that they will usually ask to update your employment to confirm that your numbers still work for your renewal. If they do work you will receive excellent rate and term options.
• A full restructuring: we work with clients at renewal to either access additional funds from their home, fundamentally change their mortgage ie from a mortgage to a line of credit, or make a large repayment on their mortgage.

At renewal we always work with our clients to ensure the best fit for them in terms of rates and terms, flexibility, and ease of use.

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In Conclusion and Thank you

I would like to thank the many clients, family, friends, mortgage associates, and lending partners that I have had the privilege of working with, helping, laughing with, and struggling with over my career thus far. A couple of special mentions that I would be remiss to mention would be my parents and family for their never ending love and support, God for his never ending faithfulness, and my kids for their never ending laughter and smiles. I love you all and am truly grateful to have you in my life. I am also extremely thankful to the many wonderful clients that I have had the privilege of working with and helping over the years, you truly make it a joy to start the day. To my many lending partners and friends from underwriters, to business development managers, to underwriting managers, thank you – without your kind hearted support and assistance we would not be in business today. And finally to my associates and staff – past and present – you are simply the best and I love you.

Here is to many more years of fun and striving toward excellence.

Rylan Hahn

February 2014