Minister Morneau Announces New Benchmark Rate for Qualifying For Insured Mortgages

The new qualifying rate will be the mortgage contract rate or a newly created benchmark very close to it plus 200 basis points, in either case. The News Release from the Department of Finance Canada states, “the Government of Canada has introduced measures to help more Canadians achieve their housing needs while also taking measured actions to contain risks in the housing market. A stable and healthy housing market is part of a strong economy, which is vital to building and supporting a strong middle class.”

These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.

This follows a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to reflect the evolution of market conditions better. Overall, the review concluded that the mortgage stress test is working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses.

This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

The existing qualification rule, which was introduced in 2016 for insured mortgages and in 2018 for uninsured mortgages, wasn’t responsive enough to the recent drop in lending interest rates — effectively making the stress test too tight. The earlier rule established the big-six bank posted rate plus 2 percentage points as the qualifying rate. Banks have increasingly held back from adjusting their posted rates when 5-year market yields moved downward. With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years.

This move, effective April 6, should reduce the qualifying rate by about 30 basis points if contract rates remain at roughly today’s levels. According to a Department of Finance official, “As of February 18, 2020, based on the weekly median 5-year fixed insured mortgage rate from insured mortgage applications received by the Canada Mortgage and Housing Corporation, the new benchmark rate would be roughly 4.89%.”  That’s 30 basis points less than today’s benchmark rate of 5.19%.

The Bank of Canada will calculate this new benchmark weekly, based on actual rates from mortgage insurance applications, as underwritten by Canada’s three default insurers.

OSFI confirmed today that it, too, is considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release.

“In addition to introducing a more accurate floor, OSFI’s proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages.” (Thank goodness, as the last thing the mortgage market needs is more complexity.)

The new rules will certainly add to what was already likely to be a buoyant spring housing market. While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive. Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.

DEBT: TO CONSOLIDATE OR NOT TO CONSOLIDATE? THAT IS THE QUESTION

If you are a Canadian living in debt, you are not alone. According to Statistics Canada, household debt grew faster than income last year, with Canadians owing $1.79 for every dollar of household disposable income to debt(1).

• Canadian households use almost 15% of income for debt re-payment(1).
• 7.3% of this re-payment goes towards interest charges (1)
• Interest charges are at their highest level in 9 years(1).
• The cost of living is projected to increase in 2020 (2)

So how can one ever get out of debt? Debt consolidation.

What is debt consolidation?
Debt consolidation means paying off smaller loans with a larger loan at a lower interest rate. For example, a credit card bill debt with interest of 19.99% can be paid off by a 5-year Reverse Mortgage with an interest rate of 5.74%* from HomeEquity Bank. (*rate as of May 2, 2019. For current rates, please contact your DLC Mortgage Broker).

A lot of confusion surrounds debt consolidation; many of us just don’t know enough about it. Consider the two sides:

The pros
• The lower the interest rate, the sooner you get out of debt. A lower monthly interest allows you to pay more towards your actual loan, getting you debt-free faster.
• You only have to make one monthly debt payment. This is more manageable than keeping track of multiple debt payments with different interest rates.
• Your credit score remains untarnished because your higher interest loans, such as a credit card, are paid off.

The cons
• Consolidating your debt doesn’t give you the green light to continue spending.
Consolidating helps you get out of debt; continuing to spend as you did before puts you even further into debt.
• A larger loan with a financial institution will require prompt payments. If you were struggling to pay your debts before, you may be still be challenged with payments. A CHIP Reverse Mortgage may be a better option; it doesn’t require any payments until you decide to move or sell your home.
• You may require a co-signer who will have to pay the loan, if you’re unable. Note that a Reverse Mortgage does not require a co-signer, as long as you qualify for it and are on the property title.

So how do you know if debt consolidation is the option for you? Start by contacting your mortgage broker and asking if the CHIP Reverse Mortgage could be the right solution for you.

SOURCES:

1 https://www.cbc.ca/news/business/household-debt-income-1.5056159

2 https://www.statista.com/statistics/271247/inflation-rate-in-canada/

https://www.bankofcanada.ca/2019/03/spending-shifts-and-consumer-caution/

https://www.cbc.ca/news/business/consumer-spending-consumption-canada-1.5006343

SUBJECT FREE OFFERS; STILL RISKY!

The majority of my clients have stellar qualifications: established careers and businesses, excellent credit ratings, solid down payment funds, etc. They are truly awesome individuals who will almost certainly receive mortgage financing without a hitch.

Almost certainly.

With multiple offers, bidding wars, and over-asking-price bids now common as far afield from Vancouver proper as Port Coquitlam and beyond, clients find themselves, in the heat of the experience, contemplating a subject-free offer.

But there’s often an unanticipated hitch: the property itself.

A client would be hard pressed to find a Realtor to write an offer without a ‘subject to inspection‘clause, and for good reason. Similarly, a client should be hard pressed to find a Mortgage Broker advising an offer without a ‘subject to financing‘ clause.

This is because no banker or Broker can give a client 100% assurance of financing without factoring in the actual specific property details. Until an appraisal is reviewed and approved, the application is not complete. And there are some properties that some lenders simply will not lend against.

There are the obvious examples that lenders tend to exclude;

• Properties containing Asbestos, Aluminium wiring, Underground Oil tanks
• Re-mediated former grow-ops
• Re-mediated drug labs.

There are also less obvious ones;

• live-work units
• row-homes (attached non-strata properties)
• properties smaller than 450 sq ft
• properties on lease land, Government, First Nations, or Private.

Regarding the appraisal process, there is more than simply the valuation question to be answered. In fact, valuation is rarely the challenge in our market, as many properties ‘auto-approve’ when the value is below $750,000. (This is not true of ALL properties below $750,000 by a long shot; many lenders condition all strata properties for instance for a full appraisal no matter the purchase price.)

What is being looked at other than value in the appraisal report?

A key complication is a little thing called ‘Remaining Economic Life or REL’ (as opposed to the ‘physical life’) of the home. This refers to how long this specific house is likely to remain standing on this property under the current care it is receiving.

Perhaps we have an otherwise perfectly habitable home for decades to come ─ lots of remaining ‘physical life’. The problem is that lenders are looking for remaining ECONOMIC life rather than the remaining physical life. The question is not “How long can that house be standing there?” it is “How long does it make economic sense for that house to be standing there given current market conditions?”

There may be a problem if it is located in a neighbourhood where many of the older homes are being purchased to be demolished and replaced with multimillion dollar homes. That leaves the purchase looking like a speculative land play or potential knock-down. As such, the remaining economic life is perhaps 15 years or less stated in the appraisal report.

Or maybe the property is a ramshackle house in a state of disrepair. It looks like the bargain of the age on paper, and perhaps the purchaser is a contractor planning to bring the home back into a wonderful state of repair. However, the appraisal must view the current remaining economic life of the home ‘as-it-sits’ not ‘as-is-planned’. We have seen homes like this with REL as short as five years.

What is this ‘Remaining Economic Life’ exactly?

Economic life is the total period of time which the improvements (house/buildings) contribute to the overall property value. The total economic life of a typical Lower Mainland home is generally accepted to be 65 years. Economic life and physical life can differ widely and physical life usually exceeds economic life. Renovations and updates can increase a property’s physical and economic life, and poor maintenance can shorten it. Increases in land value can also have a negative impact on remaining economic life. As older homes are torn down to make way for new ones, it makes less economic sense to keep the older one standing.

REL is the estimated time period which the improvements continue to contribute to property value. An appraiser estimates REL in part by interpreting the economic conditions, attitudes, and reactions of buyers in the market.

The REL is calculated by subtracting the Effective Age from the Total Economic Life.

Economic Life – Effective Age = Remaining Economic Life

For example:

A 40-year-old home that has had substantial renovations may have an effective age of 30 years.

65 years – 30 years = 35 years Remaining Economic Life (REL)

How lenders view Remaining Economic Life (REL)

Few lenders will lend on a home with a remaining REL of less than 15 years. Also, the effective amortization will be set at the REL minus five years, which drives payments sky high, and often leaves client unable to qualify for such large mortgage payments should they even want to sign on for them.

Clients can run the risk at this point of their own awesomeness being part of the undoing of the mortgage approval. Clients with significant liquid assets and strong incomes buying a smaller, older home on the street of newly built monoliths will be viewed as most likely planning to knock the home down and build a new one.

The immediate thought: ‘But the land value alone… ’

Lenders are not in the business of writing conventional AAA-rate mortgages on properties that will be torn down. Instead, this is viewed as ‘speculative’ or ‘investment/business’ lending with which come undeniably greater risks. Wherever one finds greater profits there are greater risks. Lenders price accordingly, which is why land/construction financing carries higher rates and additional fees.

A property with a habitable home standing on it is unquestionably easier to market and sell ─ and thus recover the loan balance from ─ should the lender have to step in and take over. And foreclosure is the last thing any Canadian lender wants to contemplate.

It will take on average 18 months of no payments before a lender has gained control of and sold a property through the foreclosure process. And at the end of it said lender must seek out the defaulting client and write them a cheque for the remaining equity that was in the property, all the while honoring the original interest rate in most cases.

It is nothing like the US system at all. (which is a wonderful thing for us)

So lenders avoid any whisp of risk, preferring security. Ideally in the form of a habitable home on a lot that is going to look decades from now much as it does today.

Clients would be wise to also minimize risk, by either writing offers that contain a ‘subject to inspection’ and a ‘subject to financing’ clause, or by having a detailed conversation with a skilled Broker well in advance of writing a subject-free offer.

If you have any questions, please contact me at 250-216-2230.

A TAILOR-MADE SOLUTION FOR SOME BORROWERS

Recently, two of my lenders came out with new products – Interest only mortgages. We have had these available from private lenders for many years but at much higher interest rates. They are useful for real estate investors and people who have consolidated debts and need six months to a year to get back on their feet. These new mortgages are not meant to be short term solutions but they are meant to be used for a minimum of two years and preferably for five years.
So who in their right mind would want a mortgage for five years where the principal doesn’t go down?

1- real estate investors- some investors are looking for cash flow; this is a perfect product for them. They want to keep monthly payments to a minimum so that they ca use the extra cash to buy other properties, or for income to live on. They will eventually sell the properties for a lot more cash when they are ready to retire.

2- Seasonal workers- Lobster fisherman, lumberjacks , oil patch workers and workers in the trades who have to go back to school every year for three years are the people who this product works for. During spring break-up when the oil patch closes for several weeks , the bills don’t stop coming. Working with your Dominion Lending Centres mortgage broker you can design a mortgage to help you through the periods when there’s no income coming in. The best strategy for you may be to step up the mortgage as interest only and then have the broker calculate what a normal amortizing mortgage payment for you would be. During your period of no income, you pay the minimum payments and then when you get back to work, you bump your payment up to normal or even slightly higher to make up for the shortfall.

These interest only mortgages are available with a variable rate, a fixed rate , a variable interest only plus a fixed amortized rate or a combination of any of the above rates. This allows you and your broker to customize mortgage payments to make the best mortgage for your particular situation. It’s like a tailor-made suit. It’s exactly what you need. Contact your local DLC mortgage broker for more information .

Overcoming the Challenge of Income Qualifying

When it comes time to get your mortgage, or perhaps look at investing in an investment property, income qualifying is one of the first steps you will have to take. This first step though can also be the most challenging. Let’s walk through the steps you should take:

1. What is your Employment?

Are you employed by a company and receive a consistent paycheck with a T4 slip? OR

Are you self-employed—a sole proprietor, incorporation, or a limited company (same as incorporation)?

If you are employed, you may need the following documents to provide to your broker/lender:

2 most current years T4’s

2 most current Notices of Assessment

Most recent pay stub

Letter of employment

Up to 90 days of bank history to show you have the down payment and closing cost (usually 1.5%)

If you are a proprietorship, you may need the following documents to provide to your broker/lender:

T1 Generals for the most recent last 2 years – all pages

2 most current Notices of Assessment (proof that no personal taxes are owing)

Verification of Business for Self

Business Licences

Registration of your proprietorship

Last 2 years GST/HST remittance forms

Etc

Up to 90 days of bank history to show you have the down payment and closing costs necessary

If you are incorporate/a corporation, you may need the following documents to provide to your broker/lender:

2 most current Notices of Assessment-You need to show you HAVE AN INCOME!

Up to 90 days of bank history to show you have the down payment and closing costs

Verification of Business for Self:

Last 2 years business licences

Articles of incorporation

Last 2 years GST/HST remittance forms

Last 2 years of Financial Statements

Business Registration Form

Etc

2. Work with a good Accountant or use Stated Income

Make sure you are working with a good accountant who knows what you plan to accomplish in the future and sets up your business accordingly so that you can show at least an average income on your notice of assessment (NOA).

You can also use “Stated Income” which is simply stating your income to be REASONABLE and to reflect the time you have been working within that industry instead of what you are personally reporting to Revenue Canada and paying taxes on.

For stated income be aware that you can only use this on refinancing, or purchasing primary residence, purchase plus improvements of primary residence, Second Homes, and investment properties.

3. Insurance considerations

For stated incomes, there are insurance guidelines that you need to be aware of.

Genworth and Canada Guaranty:

GDS (Gross Debt Service) and TDS (Total Debt Service) Ratio:

Credit Score of >680 and GDS/TDS ratios of 39/44

Credit score of <680 and GDS/TDS ratios of 35/42

Also, make sure that there are no personal taxes owing

Finally you will need to ensure that you are following the 2-2-2 rule. Check out our article for more information on this.

Plese note that CMHC does not have a STATED INCOME program.

Insurers give the following rate premiums for Business For Self (BFS):

As always we are here at Dominion Lending Centres to help. Contact me today! Cheryl Johns 250.216.2230 Cheryl@modernmortgagegroup.ca

This Blog post was written by Geoff Lee

10 First Time Homebuyer Mistakes

If you’re on the hunt for your first home and want to have a smooth and successful home purchasing experience avoid these common first-time homebuying mistakes.

1. Thinking you don’t need a real estate agent

You might be able to find a house on your own but there are still many aspects of buying real estate that can confuse a first-time buyer. Rely on your agent to negotiate offers, inspections, financing and other details. The money you save on commission can be quickly gobbled up by a botched offer or overlooked repairs

2. Getting your heart set on a home before you do your homework

The house that’s love at first sight may not always be what it seems, so keep an open mind. Plus, you may be too quick to go over budget or may overlook a potential pitfall if you jump in too fast.

3. Picking a fixer-upper because the listing price is cheaper

That old classic may have loads of potential, but be extra diligent in the inspection period. What will it really cost to get your home where it needs to be? Negotiating a long due-diligence period will give you time to get estimates from contractors in case you need to back out.

4. Committing to more than you can afford

Don’t sacrifice retirement savings or an emergency fund for mortgage payments. You need to stay nimble to life’s changes, and overextending yourself could put your investments – including your house – on the line.

5. Going with the first agent who finds you

Don’t get halfway into house hunting before you realize your agent isn’t right for you. The best source: a referral from friends. Ask around and take the time to speak with your potential choices before you commit.

6. Diving into renovations as soon as you buy

Yes, renos may increase the value of your home, but don’t rush. Overextending your credit to get it all done fast doesn’t always pay off. Take time to make a solid plan and the best financial decisions. Living in your home for a while will also help you plan the best functional changes to the layout.

7. Choosing a house without researching the neighbourhood

It may be the house of your dreams, but annoying neighbours or a nearby industrial zone can be a rude awakening. Spend time in the area before you make an offer – talk to local business owners and residents to determine the pros and cons of living there.

8. Researching your broker and agent, but not your lawyer

New buyers often put all their energy into learning about mortgage rates and offers, but don’t forget that the final word in any deal comes from your lawyer. As with finding agents, your best source for referrals will be friends and business associates.

9. Fixating on the lowest interest rate

Yes, a reasonable rate is important, but not at the expense of heavy restrictions and penalties. Make a solid long-term plan to pay off your mortgage and then find one that’s flexible enough to accommodate life changes, both planned and unexpected. Be sure to talk your your Dominion Lending Centres mortgage professional to learn more.

10. Opting out of mortgage insurance

Your home is your largest investment so be sure to protect it. Mortgage insurance not only buys you peace of mind, it also allows for more flexible financing options. Plus, it allows you to take advantage of available equity to pay down debts or make financial investments.

Genworth Canada – Vice President Business Development

A Conversation About Mortgage Pre-approvals

Thinking of buying a property, but don’t know where to start? Well… that’s where a mortgage pre-approval comes in. Start here. Just like you wouldn’t go into a restaurant without having enough money to buy your meal, so you shouldn’t start shopping for a home without an understanding of how much you can afford. So let’s have a conversation about a mortgage pre-approvals so you can get this house hunting party started.

Although a pre-approval is the best way to get started, we have to be honest about what a pre-approval is and what it’s not.

Not Magic. Not Binding.

Let’s start at the beginning and dissect the word pre-approval. Pre means before, in advance of, or prior to, and in this case means before the approval. A pre-approval is not an approval, let me say that again (in italics) for emphasis, a pre-approval is not the same as an approval. It’s not a guarantee of financing. it’s not magic, and unfortunately it’s not binding. There are a number of factors that come into play after the pre-approval is in place that can derail your dreams of homeownership.

• as a mortgage approval requires a property to be scrutinized, and a pre-approval doesn’t look at any property, it can’t be guaranteed.
• as your employment status can change after a pre-approval, all employment documents have to be verified as part of the approval process.
• a secondary credit report can be pulled by the lender or insurer after the pre-approval is in place, if there are discrepancies, they could decide not to proceed with financing
• mortgage rules can change and sometimes come into effect with no grandfathering.

So What Good is a Pre-Approval Then…

A pre-approval is simply a formalized gathering of your ducks, and putting them in a row. It won’t guarantee you will get the mortgage, but it will certainly uncover any major obstacles that might be in your way. Consider a pre-approval a pre-screening, where we take a look at your employment, credit history, and your downpayment, and figure out the maximum mortgage amount you can qualify for. We will also have a look at all the mortgage options available to you on the market, so you can decide in advance what product meets your financing needs.

Obstacles, like what? Well, the truth is, you only know what you know, said in another way, you don’t know what you don’t know. Did you know that they figure about 10-20% of credit reports have some kind of error on them. By taking a look at your credit report as part of the pre-approval process (instead of when you have already found the house of your dreams), you have time to fix any errors before hand. This might not sound like that big of a deal, but it could be the difference between getting financing or not.

A pre-approval usually comes with a rate-hold, this is a good thing. Rates are like gas prices, they fluctuate and go up and down from time to time. As part of taking a preliminary look at your mortgage application, lenders will typically offer a rate hold for 90-120 days on a specific mortgage term. This means that if you find a property to buy in the allotted time, even if rates have gone up in the mean time, you will get the rate that was guaranteed. What happens if rates go down, well… you get the lower rate. It’s a win win.

It’s a Process

Buying a home is a process, a process that has a lot of steps that come into play. A pre-approval is one of the first steps you take. A pre-approval allows you to collect all your documentation ahead of time, handle any obstacles that may come up, have a look at your mortgage options, secure a rate hold, and will give you piece of mind as to the next steps in the process. Regardless if this is your first time buying a place or your twentieth, a pre-approval is the best place to start. Even if it doesn’t guarantee you will get the mortgage in the end.

So if you are thinking about buying a home, let’s get started, as we would love to help you secure a pre-approval. And if for some reason you are faced with some obstacles, we will help you get on track. Contact a Dominion Lending Centres mortgage professional today!

Is the BC HOME Partnership Program Right For You?

The BC HOME Partnership Program was created for first time home buyers who have good credit and good income but do not meet the requirements for a minimum 5 percent down payment.  With at least 2.5% down payment the BC Home Partnership Program will allow you to purchase your home sooner than waiting to save the full 5% minimum down payment.

As a home buyer you can take full advantage of the program by paying back the loan amount within the first 5 years during the interest free period.  Between the 6-10 year time frame the interest rate is preset to 3.2% (current Prime rate of 2.7% plus .5%).

First step —get a pre-approval from your Dominion Lending Centres mortgage broker.

If you meet the eligibility requirements and have 2.5% for a down payment is the BC HOME Partnership Program right for you? 

The answer is “Yes”. Here’s why.

For example, consider a purchase price of $400,000 with total 5% down of $20,000.

The 2.5% loan portion from the BC HOME Partnership Program is interest and payment free for the first 5 years.  Then in year 6 payments based on 3.2% and 20 year amortization would be payable at $56 per month. In year 11-15 the rate would be reset based on the Prime lending rate plus .5% at the time.

For those home buyers with at least 5% down payment of their own funds is the BC HOME Partnership Program right for you?

The answer is “Yes”. Here’s Why.

For example, consider a purchase price of $400,000 with total 5% down of $20,000 and no money from the BC HOME Partnership Program.

The difference in using 5% of your own money versus 2.5% of your own money and 5% from the BC HOME Partnership Program will cost you $950 more in the mortgage insurance premium (rolled into your mortgage) and $2 per month more for your mortgage payment.

If you prefer to keep some of your down payment funds and take advantage of the BC HOME Partnership Program, after 5 years if you have not paid off the BC HOME Partnership loan you would have that additional payment of $56 per month. The overall cost of the mortgage and loan payments over the life of the mortgage would result in $1,080 more in interest by taking advantage of the program instead of using all of your own funds for down payment.

Note – the rates used for the first mortgage and the loan for down payment have been kept the same for this example for comparison only.  Rates are subject to change at the end of each term.

For those home buyers with 10% down payment of their own funds is the BC HOME Partnership Program right for you?

The answer is “Yes”. Here’s Why.

Consider a purchase price of $400,000 with total 10% down of $40,000 (5% from own resources and 5% from the BC Home Partnership Program).

The difference in using 5% of your own money and 5% from the BC Home Buyer Program versus 10% of your own money is $720 less in the insurance premium (as you have a larger down payment) and $148 per month less for your mortgage payment.  After 5 years if you have not paid off the BC HOME Partnership loan you would have that additional payment of $112 per month.  If you continue with the loan throughout the life of the mortgage the net overall savings in interest is $5,000.

The BC HOME Partnership Program provides a cost effective options for first-time home-buyers.

Your down payment portion can come from savings including RRSP or gifted money from a family member.

Note – the rates used for the first mortgage and the loan for down payment have been kept the same for this example for comparison only.  Rates are subject to change at the end of each term.

These are only an example of the options for you as a first-time buyer and subject to income, credit and residency qualification. 

To ensure you are clear about the opportunity for your specific situation contact your mortgage broker.

For full details on the program visit the BC HOME Partnership Program website: https://www.bchousing.org/housing-assistance/bc-home-partnership

Blog written by Pauline Tonkin

Pauline is part of DLC Innovative Mortgage Solutions based in Coquitlam, BC.