Six-month term – A possible stress reducer

Mortgage Tips Brian Turner 30 Jun

Using a Six-Month Term to Qualify for a Larger Purchase

Real estate sold sign - could be yours with a six-month rate

Six-month term as a stress reducer

One of the lenders, with whom I work, recently came out with a six-month fixed rate. The rate is 4.5% with 1% deferred interest. If the borrower renews at the end of the six-month term for 3 years or longer, they waive the 1% deferred interest. This means that the borrower qualifies at 6.5% instead of their current rate (5.04%) plus 2% (7.04%). Anyone using this special rate qualifies for a purchase of about 4.85% more. 

 

There is a risk that at the end of the term, fixed rates will be higher than they are today. However, for the last three months, this lender has consistently been 0.1%-0.2% below other lenders. These rates are current as of June 30, 2023, and are subject to change at any time.

For more details, please do not hesitate to contact me at 249-353-3278, 819-425-0911, or at bturner@nextdayapprovals.ca. Alternatively, you can apply online here.

3 Hacks to win a multiple offer

Mortgage Tips Brian Turner 19 May

3 Hacks to Win a Multiple Offer

Sold over asking sign

Multiple offers are back. Are you prepared?

The market has been heating up over the last three months. We are starting to see multiple offers again. We are starting to see houses going over asking again. Take some time to learn the lessons from the last time the market overheated during the pandemic.  This is the key to success to winning a multiple offer.

Hack 1: Borrower pre-approval

Understand that pre-qualification and pre-approval are very different things. A pre-qualification occurs when an employee at the bank asks how much you earn and gives you a number. A pre-approval is more detailed. I will take the time to document your income with letters of employment, paystubs and income tax information. With your consent, I will pull your credit bureau and help you figure out how to minimize your monthly expenses. Typically, lenders offer pre-approvals at slightly higher rates than their current offers. Lenders like to have a little wiggle room in case rates go up before your offer is accepted. However, the pre-approved rate is a ceiling. If rates go down, you’ll get the lower rate.

Hack 2: Property pre-approval

Pre-approval as a buyer is what almost everyone does in today’s market.  But buyers are only one part of the mortgage equation. The other portion is the property itself. I can also pre-approve properties. If you send me copies of the listings in which you’re interested, I can vet these properties.  I’ll forward the listings to the mortgage default insurers to make sure that there are no red flags on the properties. If it is a property that you really love, consider getting a pre-purchase home inspection. In the last round of multiple offers, many buyers found defects after closing and regretted not having a home inspection condition.

Hack 3: Write the seller

In the era of multiple offers, the steps above will help distinguish your offer from those of others. It will demonstrate to the seller that even without conditions your offer is likely to proceed. However, that’s what everyone else is doing.  To distinguish your offer from everyone else’s, consider adding a personal letter. The one thing that you and the seller have in common are your hopes and dreams for the property.  Some sellers ignore these letters, but a surprising number of sellers weigh these letters heavily. They have grown to care for their neighbours. Many want to make sure that their legacy is selling their house to someone that will continue to add value to the community. Some sellers will consider lesser offers because of these letters.

In conclusion, do not rush the home buying process. Multiple offer situations encourage people to sometimes make quick decisions. If you have your ducks lined up properly, you can make an offer confidently, with an increased chance of success.

I can be reached at: bturner@nextdayapprovals.ca or 249-353-3278.

Qualifying Ratios

Mortgage Tips Brian Turner 6 May

Qualifying Ratios

In Canada, all mortgages need to qualify under the B-20 stress test.  The stress test is simply a set of two qualifying ratios that ensure that a borrower has the financial capacity to weather an increase in interest rates. Under the current B-20 regulations, the qualifying rate is set at the higher of 5.25% or the contract rate plus 2%. In today’s market this means that borrowers are qualifying as if the interest rate was at least 6.44%

Gross Debt Servicing

The first qualifying ratio is gross debt servicing. Real Estate professionals sometimes refer to this with the shorthand of PITH (Principal, Interest, Taxes, Heat). In other words, the mortgage payment, 1/12th of the property taxes and at least $100 for heat. Gross debt servicing can not exceed 39% of monthly pre-tax income.

Total Debt Servicing

The second qualifying ratio is total debt servicing. Total Debt Servicing is PITH, plus car payments, plus 3% of any credit card debt, plus 1% of any outstanding student loans.  Total debt servicing can not be more than 44% of monthly pre-tax income.  Often, car payments are a limiting factor. Fortunately, I have a service that can help reduce car payments. They do this for late model cars by spreading out the payments over a longer period of time. Alternatively, it can also make sense to reduce one’s down payment in exchange for paying down debt. This can help maximize the amount of house that one can qualify for.

Conclusion

When the OSFI first introduced the B-20 qualifying ratios in 2017, many saw this as a hindrance to home ownership. However, as interest rates have increased over the last year, the stress test is actually helping ensure that borrowers have the capacity to withstand the increase. Because borrowers qualified at an interest rate of at  least 5.25%, they have the capacity to pay higher interest rates. Unfortunately, variable rates are for the first time in 30 years higher than fixed rates.  The best variable rates currently available are Prime -0.9% which amounts to 5.8%. This is greater than the interest rate at which borrowers originally qualified, but not terribly out of line. All of this means that because of the stress test, borrowers might not be in great shape, but should be able to weather this current higher rate environment.

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!

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.

 

Prepayment – Terms and conditions apply

General Brian Turner 9 Mar

prepayment terms

Pay close attention to the prepayment terms and conditions in your mortgage commitment.

Prepayment penalties apply to almost every mortgage

All of the banks have what they call customer retention programs. In the mortgage fine print of a fixed rate mortgage, it is called a prepayment penalty. In more positive terms, a prepayment privilege. Most lenders have a 15% annual prepayment privilege, and some have 20% prepayment privilege.  If you exercise your annual prepayment privilege, you don’t encounter a penalty. If you go beyond the privileged prepayment, you will incur a penalty.  These penalties  exist because the mortgage holder has either contracted with GIC holders and offered them a guaranteed rate of return. Alternatively the lender may have sold your mortgage on the bond market and needs to buy it back.  

Not all prepayment penalties are created equal

The big five banks often use a sleight of hand in their interest rate differential. This takes the form of factoring a discount between their posted rate and the rate that they issue you in your mortgage contract. I have seen this go as high as 7% of the outstanding principal. The monoline lenders where I place most of my clients’ mortgages have a simpler way of calculating their interest rate differentials. Their interest rate differential is the difference between your current rate and the rate on a similar time period remaining in your mortgage. Usually, this amounts to about 1% or less of the outstanding balance.

Variable rate may be an option

In contrast, the easiest way to avoid prepayment penalties is to go with a variable rate mortgage. Unfortunately, for the first time in 30 years, these are more expensive than the fixed rate mortgages (by about 0.8%) . A variable rate mortgage has a simple three months of interest penalty. If you’re likely to need to break your mortgage before the term is up, talk with me to see if this makes sense.

No such thing as free cash

Also, be aware also of cash-back mortgages. The lender gives you a set amount of percentage of cash at the start of the term. Then, you pay for this cash throughout the term with a higher interest rate. There is at least one big 5 bank that if you repay your mortgage at any point before the end of the term, even the day before, you owe them the entire cashback amount that they advanced at the start of the term. This is despite the fact that you’ve been paying for this cash throughout the term with a higher interest rate.  The lesson here is to use a mortgage professional such as myself to walk you through the terms and conditions of the lender’s mortgage commitment. This helps guarantee that you’re not surprised if life happens and you need to repay the mortgage.

Brian Turner
249-353-3278
bturner@nextdayapprovals.ca

When does a reverse mortgage make sense?

Mortgage Tips Brian Turner 1 Mar

Is a reverse mortgage right for you?

The first ever reverse mortgage that I did was for an existing client.  Dave and Lisa were retirees who had taken on a bit too much debt. I helped them find a second mortgage on their home to consolidate their debts and get their monthly payment down. We planned to combine the first and second mortgage with a refinance when the term on the first mortgage came due.  Unfortunately, in the eighteen months between funding the second mortgage and the end of the term of first mortgage, Lisa got quite ill and passed away.

Our original plan was no longer workable. Dave could no longer  qualify for a mortgage with only his pension income. I proposed a reverse mortgage. The lender would  pay off the existing first and second mortgages. The lender would become the mortgage holder against the title of his home. Dave would not have to make payments on the mortgage, instead interest would be added to principal monthly. I urged Dave to carefully discuss it with his and Lisa’s children.  

Pros and Cons of a Reverse Mortgage

Together they came to the conclusion that a reverse mortgage made sense. Firstly, it would allow Dave to stay in the house he had shared with Lisa. This was important because Dave had looked at the housing market and quickly realized that even with a sizeable down payment from the sale of his house, there was little he could afford. Secondly, with a reverse mortgage, Dave would not have to make monthly mortgage payments that were at the time eating up his pension and not allowing him any disposable income. Finally, they considered that his and Lisa’s children would not receive as much in the form of an inheritance. For Dave’s immediate quality of life however, a reverse mortgage made sense.

Months later Dave called to thank me. Lisa’s passing had caused him significant financial stress. With only one pension coming in, almost all of his income was going to service the mortgages.  The reverse mortgage freed Dave up from this stress and allowed him to start navigating this new phase of his life.  

If any of this resonates with you, please get in touch with me at: bturner@nextdayapprovals.ca or 249-353-3278

Thriving Without Conditions of Financing

Mortgage Tips Brian Turner 28 Jul

3 Tips for Surviving and Thriving Without Conditions of Financing

Thriving Without Conditions of Financing to purchase for example a timber frame and stone house
Current market conditions are such that offers with fewer conditions tend to be more successful. In other words there in an inverse relationship between the number of conditions and likelihood of success. One of the conditions that buyers often drop is that of financing. Dropping a financing condition exposes you to legal risk if the financing falls through and you are unable to complete the transaction.  This is all to the seller’s benefit. As a buyer, you are in a difficult bind where the only way to be successful is to potentially expose yourself to legal jeopardy.

Borrower Pre-qualification

Fortunately, it is possible to minimize the risks of your financing falling through by working with a mortgage broker such as myself. First-up, I will make sure that you are fully pre-qualified by collecting all of your income, employment, and down payment documents upfront. I will also pull a credit bureau to establish a purchase budget with you. If necessary and possible, we can explore options to restructure any existing debts, or bring on a cosigner.

As a general rule, banks do not spend a lot of time on this initial process. The bank will often simply consider your stated income and come up with a budget figure.  I have seen this many times result in surprises in the weeks just before closing. In contrast, I am able to get you a written pre-approval commitment from a lender. Some of the lenders with whom I work will underwrite the file and double check my math and verify your documents. This written pre-approval helps to strengthen your offer. If your offer is successful, the lender can quickly issue a commitment and sign-off on the conditions without the need for more documents

Property Pre-clearance

The second potential pitfall is the property itself.  I work with you and your realtor and pre-clear any properties in which you are interested. I vet the property with both the lender and, the mortgage default insurer. (In Canada, any mortgage with less than a 20% down payment requires mortgage default insurance). If any of these properties have red flags on the lender side,I’ll let you know and you can steer clear of them. Red flags would be things like asbestos, former grow-op or even foundation issues. The end result is that the lender pre-clears both you and the property. 

Appraisal Contingency Plans

Finally, I work with you to ensure that you have contingency plans. When offering more than asking, it is possible that the lender or the insurer will ask for an appraisal. We draw up a plan to make up any difference in the unlikely event that the property appraises at a value lower than that of your offer.

Peace of Mind

Together we identify and minimize these potential pitfalls in the financing of a new home. You will be able to decide to present a successful offer that will grant you peace of mind.  You can have the confidence to present a strong offer that is as robustly backstopped as possible. We will have the necessary documents collected so your mortgage will fund on-time.

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Why Next Day Approval?

Mortgage Tips Brian Turner 21 Sep

How am I able to offer next day approval? The quick answer is that I work with you and on your behalf before you place an offer. I work with you to smooth out any of the potential bumps in the financing road. The more detailed answer follows below.

What I do

As a mortgage agent, I have access to over 52 different lenders. This means that we can co-construct a mortgage that meets your exact needs and circumstances. When your realtor refers you to me, I start working on your behalf right away. In order to get started, you will need to:

  1. Fill in an online application.
  2. Authorize me to do a credit check (pdf)
  3. Send me documentation  of your income (such as T1’s, pay stubs or a Notice of Assessment).

With that information in hand, I’ll be able to let you know how much of a mortgage you can afford. I may ask you for additional documentation of your employment income or the source of your down payment. I might offer some advice about alternative ways to structure your current debts.

Next, with all of this information in hand, I will reach out to one of the underwriters from one of the 52 different lenders I work with. These underwriters are commission-based, and like me work 24/7. At this point, I will be able to let you know that your eligibility for a mortgage has been pre-approved.

I’ll also ask you to send me links to the mls listings for the properties that you are considering. This helps ensure that the properties you are considering, match the lender’s criteria.

All of this means that when you make an offer on your dream property, you can be confident the approval for the financing ready to go. Because I’ve done work for you ahead of time, approval is fast.

What the banks do

If you seek out a loan at a bank, they might initially just look at your income, quote you a rate, and give give you a ballpark figure for a maximum mortgage.  This is makes you pre-qualified. If the bank does not take the time to look at your credit report, this can lead to problems when you make an offer.  If you are dealing with a bank, please be sure to ask your bank for a certificate of pre-approval.

Unlike me, the banks have access to a limited number of products. Banks are conservative institutions. They like good credit and salaried employees. Life happens and not everyone fits in this category. The lenders I work with have common sense lending criteria. If you can demonstrate why the lender should approve your mortgage, it is likely they will. This is not generally the case with the banks.

Banks and bank employees usually only work weekdays from 9 to 5. In contrast, the underwriters I work with and I are available any time of day including weekends to ensure approval.

Banks do not look at the properties you are considering. When you make an offer on a property, you need to wait up to 10 nail-biting business days to find out if the bank will or will not reject your mortgage application.

Get me working for your next day approval

I am only a phone call away. Call me at 249-353-3278 or toll free 1-877-333-4983 x734.