Hi, how are you,
I have had a few inquires on the upcoming qualifying rate increase expected to kick in on June 1st. We expect this to represent roughly a $40,000.00 reduction in a traditional conventional mortgage approval. This rate increase is only for conventional mortgages and not High Ratio mortgages which will remain at the current 4.79% qualifying rate. Conventional mortgages are purchases of $1,000,000.00 and above, a refinance (taken out equity), or adding an equity line of credit. Overall I don’t see this having a big impact on the real estate market. For a borrower who is right at their limit for borrowing then they would see a reduction but for borrowers who qualify for a larger mortgage than what they need, it is not an issue. Also, as a mortgage broker, we have access to lenders who make exceptions on qualifying limits all the time and there are other product options if the clients need them. A product option that allows higher borrowing limits can come with an increase in the rate but with the current low rate environment, the rates are still very favorable. So my message is not to be concerned about this latest change. The media will make a bigger deal out of it than needs to be.
This low rate environment still presents a great opportunity to switch to a lower rate, refinance to debt consolidate, add on a line of credit or take out equity to renovate your home or for a down payment on another property.
Please reach out to me with any questions.
New To Canada Mortgage
If you are a new immigrant to Canada, obtaining a mortgage has never been easier. You can qualify for a standard mortgage of up to 95% of borrowing. That is right, up to 95%! This program is open for all new immigrants with permanent residency, temporary residency, or a work VISA.
Guidelines for qualification are:
- Must have landed in Canada within the last 3 to 5 years (depending on the lender)
- Must have full-time permanent employment for over 3 months
- Must have a down payment of at least 5%
- For borrowers who do not have established credit in Canada must provide two sources of credit information such as rental agreement, phone bill, bank account, etc. An international credit bureau can also be used pending lender stipulations
Some of the main challenges that I come across when working on a mortgage that is part of separation is, there not enough equity in the property to pay out the other party, income is not high enough to qualify or the borrower has credit issues. Clients will typically put the cart before the horse in that they agree on possible terms in the separation regarding the house etc. before receiving a mortgage approval. So been prepared upfront or as close to been prepared as possible can save a lot of pain later in the process.
In today’s mortgage financing world mortgage lenders such as banks, credit unions, trust companies, etc. all have their own guidelines especially when it comes to borrowers going through a separation. If the client is dealing directly with their bank or another mortgage lender directly and that lender cannot approve the loan based on their guidelines the process needs to start all over again with another lender.
As a mortgage broker, I have access to all the mortgage lenders so once I review the application and review the documents, I know exactly the mortgage will fit and the terms right away, so no time is wasted in the process going from one lender to the next. This makes the process run so much smoother for all parties involved and if there are issues to be dealt with (and there are a lot of the time), then we know that upfront and therefore can deal with it and most importantly find a solution.
One of the niche mortgage products available where a separation is involved is called a Spousal Buy-Out Mortgage. The lender will allow the borrower to refinance up to 95% of their property value rather than the 80% which is traditionally the maximum limit allowed. It is technically a purchase from one spouse to the other. The product must be insured with one of the three insurers in Canada, CMHC, Genworth, or Canada Guaranty, and therefore apply to the mortgage insured rules. For insured mortgages, the property value cannot be valued at more than $999,000.00 and the maximum amortization is 25 years. So, anything outside of this box will need to be a conventional uninsured mortgage up to a maximum loan amount of 80% of the property value.
Each insurer has its own guidelines. CMHC will not allow any debts to be paid out with the spousal buy-out, Genworth will only allow Joint debts to be paid out, Canada Guaranty will allow both joint and non-joint debts. This is especially important to know because if your clients need to consolidate or payout debts as part of the spousal buy out and their bank or current lender only work with CMHC as an insurer, which is the case with a lot of lenders, then the client will not get approved and the process begins again. Again, by having access to all the lenders both A and B we can avoid a lot of these unnecessary issues.
To summarize, I have helped a lot of clients going through a separation obtain a mortgage. A lot of them were referred to me by lawyers or banks mainly because the clients have been turned down by their original lender. It would have saved a lot of pain for all the parties involved if the client had worked with me directly from the beginning.
Purchase Plus Improvements Mortgage
This mortgage product allows the purchaser of a primary or investment property to add some immediate renovation costs onto the new mortgage. The renovations must improve the value of the property such as new flooring, roof, windows, kitchen, or bathrooms.
Part of this process includes obtaining a quote/estimation of the cost of the renovation. This can be obtained from a professional contractor or home department store such as Home Depot. This quote/estimation must be submitted with your application to the lender at the same time as the mortgage approval
Upon closing, the mortgage and renovation funds are sent to your lawyer. The lawyer is instructed to hold back the renovation funds until the work is completed. An inspector from the lender will come out to the property to make sure the work is completed. Typically, the client has 90 days to complete the work after the closing of the mortgage. If the renovations take longer that is not a problem however the work must be completed in adequate time. Once the inspector signs off on the work the funds are released to the client to cover the cost of the renovations and added to the mortgage by the lender. Please note the borrower must have access to funds to complete the renovations first or have a contractor who will do the work upfront and then get paid once the lawyer releases the funds. Most contractors will work this way especially when you can show them the funds are ben held with the lawyer.
Critical points to note:
- Improvement loan is kept to within $40,000.00 for insured mortgages and $60,000.00 for non-insured mortgages (20% down or more).
- Available on owner-occupied and investment properties
- Available on high ratios and conventional mortgages
- The client receives the same interest rate as with a regular mortgage and if insured the premium is the same. No extra costs.
- A detailed quote/cost sheet for renovations must be submitted with the mortgage approval application.
Explaining the Mortgage Rate Game
As mortgage Brokers we get to discuss mortgage rates daily and to be honest trying to explain why one rate is different from another based on the type of mortgage, amortization, etc. can become repetitive over time however I do realize that there is a lot of unclear information out there especially on the internet regarding mortgage rates so I thought I would try to explain why there are different residential mortgage rate quotes in the market and why you may find yourself in one rate box and not the other. (Please note I am referring to A lending products i.e. best terms and rates. B or Alt-A lending fall under another category)
Most online rate quotes will quote the lowest possible rate in the market to draw you in without an explanation of the mortgage product it is attached to. As a result, this can leave a borrower confused and frustrated when applying for a mortgage but then been told sorry you do not qualify for that rate.
Mortgage rates are related to the type of mortgage product you are obtaining and although credit and income are very important factors for qualifying it is the mortgage product type that will dictate the rate once approved.
Insured Mortgages are those mortgages that are backed by one of the three mortgage insurance companies in Canada. The most well know is CMHC however there is also Genworth and Canada Guaranty. A mortgage can be insured in two ways. One is a High Ratio mortgage. This is when a borrower purchases a property with less than 20% down payment and so pays the insurance premium which is added to the mortgage. For this type of mortgage, the purchase price must be under $1,000,000.00 to be insured and the amortization can be no longer than 25 years.
An insured mortgage with no premium. If you are purchasing a mortgage with 20% or more down, you can get an insured mortgage (this just means your mortgage is insured in the back end by the insurer), but you pay no insurance premium. Again, the purchase price must be under $1,000,000.00 and a maximum of 25 years amortization.
Both these options above will get you the lowest rates on the market and typically these are the rates you see quoted on-line. If your mortgage is up for renewal and you do not take out any extra money (refinance) you can also qualify for insured mortgage pricing with no insurance premium. You must meet the same criteria as above, property value under $1,000,000.00 with a maximum of 25 years remaining on your amortization.
Current 5-year insured mortgage rates are between 1.69% and 1.79% on a fixed and 1.65% to 1.75% on a variable. There is also No Frill insured mortgages available where one can get another 10bps reduction off the mortgage rate, but you give up something in return. There are clauses such as a bonafide sale clause: this means you cannot break the mortgage throughout the term unless you sell the property or a higher penalty clause means you pay a lot more in penalties to break the mortgage. Be aware of these No Frill mortgages. They look tempting but you can get burned if you run into a situation where you need to get out of the mortgage before the term is up. You need to decide on whether the extra savings is worth the risk or not. If the rate quote is lower than the traditional discount rate then there is a good chance it is a No Frill mortgage product. Not everyone discloses that upfront so ask.
Non-Insured mortgages (sometimes called conventional mortgages) are mortgages that have a purchase price of over $1,000,000.00, or a refinance (adding more money to the mortgage, taking out a secured line of credit, or amortization of 30 years. So, for example, if you are purchasing a home that is over $1,000,000.00 you cannot get an insured mortgage and you must have at least 20% down. If you are refinancing to consolidate debt, take out equity for a down payment on another purchase, add on a secured line of credit this mortgage cannot be insured. The benefits of non-insured mortgages are that you can extend the amortization to 30 years to keep your payment lower or qualify for more borrowing and you can take out equity or consolidate debt. Mortgage rates for 5-year non-insured mortgages are in the 1.99% to 2.04% range for fixed and 1.85% to 1.95% for the variable.
So, as you can see there is a spread between insured and non-insured mortgage rates. If you are purchasing for over $1,000,000.00, refinancing, or need a 30-year amortization then you cannot get the insured pricing, so the rate quote you see online of 1.79% or lower is not relevant to your requirements.
Rental properties whether a purchase or refinance come with a rate premium of another 20bps to 25bps above the conventional non-insured mortgage rate pricing and require at least 20% down payment if purchasing or over 20% equity if refinancing.
It is not just about the rate: When deciding on your mortgage focus on the mortgage that best fits your needs. Maybe you can qualify for insured pricing at 20% down but the payment over 25 years is too high. In this case, you take a 30-year amortization with a higher rate, this will suit your overall monthly cash flow which is the most important thing to you right now. You can always change things up later on.