Closing Costs

Mortgage Tips Brian Turner 29 Apr

Closing costs

Closing costs

What are these mysterious closing costs for which I’m being asked to have additional funds?

For a purchase, all lenders require that you as a borrower have sufficient funds on hand for closing costs.  The requirement amounts to an additional 1.5% of the purchase price.  As a result, with this added cost, it means that the minimum cash reserves to buy a house are not 5%, but rather 6.5%.  Like the down payment, the closing costs can come from savings or can be a gift. Please note that if the funds are being gifted, there donor will need to sign a letter that they do not expect to be repaid. These funds go to pay for things like:

  • Appraisal
  • Moving
  • Home inspection
  • Legal fees
  • Adjustments
  • Land transfer tax (first $4000.00 waived for first time home buyers)

Adjustments

Please note that your solicitor will inform you of the last 3. All of the items on the above list are pretty much self-explanatory except for adjustments. Adjustments refer to anything the seller has prepaid from which you’ll gain future use. Some sample adjustments might be:

  • Property taxes
  • Propane (if there is propane)
  • Hot water heater rental (if there is a rented hot water heater)
  • Road fees (if the property is on a private road)

Be aware that your lawyer will prorate the adjustments so that both the seller and you as a buyer pay for the proportion of the year for which each owns the property.

Finally, you should note that lenders that offer cash-back mortgages will not consider the cashback as part of the down payment or closing costs. 🙁

If you would like to set up a savings plan to get into a position to purchase a new home, please do not hesitate to contact me at: 249-353-3278 or at bturner@nextdayapprovals.ca. Alternatively, you can download my app to see closing costs in detail!

Types of Mortgages

General Brian Turner 20 Apr

Types of Mortgages

Toy house with loonies

Mortgage rates vary depending on the type of mortgage

In Canada, mortgages are either high ratio (insured) or conventional. The hard border between these two types of mortgages lies at 20%. If you have 5-20% as a down payment, you require mortgage default insurance. If you have more than 20% down, the lenders consider your mortgage to be conventional. The conventional category also has two subcategories, depending on the type of lender. Monoline lenders (lenders that have no brick and mortar branches), distinguish between insurable and uninsurable mortgages. Banks tend to only have conventional mortgages, but charge extra for amortizations longer than 25 years.

Type 1: Insured mortgages

The type of mortgage with which most borrowers are most familiar is the insured mortgage. Few first time home buyers have more than 20% to put down. The rates are the lowest because the lender is passing the risk off to the mortgage default insurer. All high ratio mortgages require mortgage default insurance. This is available only for purchases less than $1M. The premium is added to the mortgage principal, so although the rate is lower, the APR is actually higher. The premiums vary with the percentage of down payment according to the table below:

Down Payment

 Premium Rate

15%-19.9%

2.80%

10%-14.9%

3.10%
5%-9.9%

4.00%

* from Sagen

Although the lenders add mortgage default insurance premium to the principal, they do not add the  Ontario provincial sales tax. Borrowers pay the sales tax at the lawyer’s office when they sign. 

Type 2: Conventional (insurable) mortgages

Another type of mortgage are the insurable mortgages. Lenders consider purchases for less than $1 million, with more than 20% down and a 25 year amortization, to be insurable mortgages. The lenders either self-insure or pay for mortgage default insurance. This is an important distinction between insured and insurable mortgages. The borrower pays the mortgage default insurance in an insured mortgage, but the lender pays the premium in an insurable mortgage.  

There is also a difference between banks and monoline lenders. Because monoline lenders are paying for the mortgage default insurance premium, they offer different rates depending on the amount of the down payment. If a borrower has 35% or more as a down payment, in general the rates available are the same as for an insured mortgage. On the other hand, banks offer just one rate for conventional mortgages, as they self-insure. Banks also have the luxury of being able to consider only total debt servicing on insurable files. In contrast, monoline lenders consider gross debt servicing (principal, interest, taxes and heat) in addition to the total debt servicing. This means, for clients with little debt, they can extend their buying power by placing the mortgage with a bank if they have a large down payment. I have access to 3 banks: Scotia, TD and HSBC.

Type 3: Conventional (uninsurable) mortgages

If you’ve been paying close attention, you should be wondering about refinances, amortizations of 30 years and purchases over $1 million. Lenders will also work with these uninsurable files. Because the lenders are not able to pass the risk off to someone else, they charge the highest interest rate on these files. Lenders also mitigate their risk by having a sliding scale for the amount of down payment required. For example: 20% of the first $1 million, 40% of the balance.

In general banks do not distinguish between insurable and uninsurable, but do charge a premium of 0.1% for amortizations longer than 25 years. The banks that I work with, also only consider total debt servicing for uninsurable files.

In conclusion, the mortgage landscape can be confusing. There are a variety of types of mortgages depending on individual circumstances. As a trusted mortgage partner, I can help you get the right product for your circumstances and goals. Feel free to call me at 249-353-3278 or email me at bturner@nextdayapprovals.

Mortgage Hacks

General Brian Turner 12 Apr

Mortgage Hacks

Mortgage Application Approved

Simple hacks to getting a mortgage application approved

In Canada, all mortgage applications with a financial institution are subject to the B-20 stress test. This means that the borrowers need to qualify at the higher of the contract rate plus 2 percent or the Bank of Canada rate (currently 5.25%). Qualifying refers to meeting 2 ratios. The first is gross debt serving (GDS), also known as PITH (Principal, Interest, Taxes and Heat). For most borrowers, GDS can not be greater than 39%. The second is total debt servicing (TDS). This refers to PITH, car payments, 3% of credit card balances and 1% of student loans. TDS cannot be greater than 44%.

This is why as a mortgage broker, one of the first things I do is pull a credit bureau. This helps qualify a borrower ahead of shopping for a home or investment property. These tests are stringent and not everyone can clear this bar. Fortunately, there are some hacks that can help borrowers satisfy these tests. As part of my initial call with borrowers, I explain some potential mortgage hacks to help them maximize their borrowing potential.

Mortgage Hack #1: Increase Income 

The most common way to increase income is to add more borrowers to the file. For example, parents often agree to help out their adult children by co-signing for the mortgage. This means that the co-signers go on title. There are two downsides to this hack. Firstly, the co-signer(s) are limited in their future borrowing as the PITH from this new property needs to be taken into account for their total debt servicing. Secondly, there can be capital gains implications. As such please consult  a tax planner or lawyer.

ATnother way to increase income is to use the Canada Child Benefit (CCB). Most lenders will consider using 100% of the CCB for children that are aged 13 or under. Lenders won’t consider using the CCB for most teenagers, as the benefit ends at age 18 and the lenders want to guarantee the income for the term of the mortgage.

Mortgage Hack #2  Increase Down Payment

If borrowers are able to save more than 20% of their down payment, then 3 factors come into play. Firstly, they no longer have to pay for mortgage default insurance. The lender pays for this. As a result, the interest rate is nominally higher, but the payments are lower. Secondly, they can opt for a longer amortization period. This means 30 years to repay the mortgage instead of 25. Again, this incurs a higher interest rate, but the payments are lower. Finally, I work with some lenders that ignore GDS altogether, and consider only TDS when the down payment is 20% or more. This works best for clients without car payments or additional debt. 

Mortgage Hack #2B Increase Down Payment with Government Equity.

Through the first time home buyer’s incentive(FTHBI), buyers can qualify for an additional 5% towards their down payment. This has the effect of reducing the mortgage default insurance premium and the principal. As a result, buyers can qualify for slightly larger purchases. However, this program comes with several downsides. Firstly, it is narrowly targeted, which makes it difficult to qualify for. Secondly, the government owns a 5% equity stake of the home. For example, if the original amount of the FTHBI was $10,000 and the house doubles in price, the homeowner(s) will need to repay $20,000. Thirdly, the government registers a second mortgage against the house for the amount of the equity stake. This means that the homeowner(s) can not qualify for a line of credit without first clearing this second mortgage.

The net result result is that this is not a hack that I recommend unless the borrower(s) know that they are coming into some funds to repay it in a 6-12 month time frame.

Mortgage Hack #3 Reduce Mortgage Payment

In addition to Hack #2, another way to increase borrowing power is to locate a property with a rental suite. (The rental suite needs a separate entrance, separate kitchen and separate bathroom). There are two ways that lenders treat rental income. Most lenders take 50% of the rent and add it to income. However, I have one lender that uses 100% of rental income as an offset. This means that if the clients can locate a property with a rental suite, the PITH is offset (reduced) by the amount of the rent. For example, if a property had a mortgage payment of $3000 per month, and a rental suite rented for $1200 a month, the borrower(s) would only need to qualify on a payment of $1800 per month. These properties are hard to find and not everyone is willing to become a landlord.

Mortgage Hack #4: Reduce or Pay off Debts.

Many clients can qualify for a mortgage on the basis of GDS, but they have other debts that can throw the TDS out of whack. If they have significant savings and are able to, it can in some cases make sense to reduce the down payment and pay off some (or all) of the debt. Alternatively I work with a service that can stretch out the amortization of car loans, so that the payments are reduced.  Both of these can help clients get the TDS inline and help qualify for a larger amount.

A Tailored Approach.

Not every one of these mortgage hacks is right for every situation.  I can only recommend the best solution after an in depth conversation. Please feel free to reach out to me at 249-353-3278 to see if any of these hacks might help you qualify for the home you’re hoping for.

The importance of an exit strategy

Private mortgages Brian Turner 6 Apr

The importance of an exit strategy

A woman called me on the verge of tears on Saturday morning as she was at risk of losing the family home. She and her husband as well as her daughter and son-in-law had purchased a home in February of 2022. In retrospect, we now call this time peak frenzy. However, they did not know it at the time.  They paid just under $1M for a beautiful home. The clients put down 16% from the proceeds of a previous sale as their down payment. They lacked an exit strategy from their private mortgage. They were on the verge of losing their original downpayment.

The plan

They went to one of the big five banks for financing. The bank’s representative told them that their credit was a little low, and to come back in a year.  In the meantime, the bank had this “B” lender with whom they worked with could help them with the purchase.  Come back and see us in a year and they’d be able to qualify for a regular mortgage. The clients did not at any point talk with an independent mortgage broker or a mortgage agent, just the representatives from the bank and the private lender. 

Reality: Why an exit strategy was needed

The private lender registered a 1st mortgage of 75% and a second mortgage of another 15%.  In other words, lender fees ate up over a third down payment. The lender registered mortgages amounting to 90.2% of the value of the property. No one alerted this family to the fact that refinances are limited to 80% of the value of the property. This was not a viable exit strategy, but the bank and the lender only saw a way of making a quick buck.

Hard exit

One year in, the bank appraised the property.  The property’s value had dropped to 17%. The bank was prepared to advance 80% of this new value, but it was less than 70% of the original value. The family needed an additional $200,000 to pay off the two mortgages. The private lender wanted their money back. The lender gave them a one month extension and then a notice of foreclosure. Without a viable exit strategy, this family is now facing foreclosure, homelessness and the loss of their family business. This story does not have a happy ending. The family is selling their house in a rush. They will be lucky if they can clear the mortgages, and will likely need to take on debt to pay the realtor fees.

It did not have to be this way. 

Responsible mortgage brokers see private lenders as lenders of last resort. As Dustan Woodhouse points out, there is a role for private mortgages. We as mortgage brokers have to make it clear that lenders are lending against the strength of the property, not the borrower’s credit. We make sure that their clients have a viable exit strategy so that others do not end up in the same situation as this family.