Tuesday, March 02, 2010

Mortgage Time!

On February 16th, 2010, Federal Finance Minister Jim Flaherty announced three changes to the mortgage insurance rules, which will come into effect on April 19th, 2010.

The good news is that most mortgage consumers will not be significantly impacted by the three latest changes. The intentions of the new rules are to curb speculation housing and encourage homeowners to use their homes as a savings tool, rather than borrowing home equity to pay down loans and credit cards.

Rule #1
Minimum down payment requirements for non-owner-occupied homes will increase to 20% from 5%, and the way that rental income is considered has been scaled back as well. This rule will have the most dramatic impact of all three changes, but only on real estate investors. Being required to put more money down and being able to use less potential rental income for qualifying purposes will displace many new real estate investors (who currently only make up around 4% of all mortgage consumers in Canada).
This change is intended to avoid any kind of future housing bubble in Canada by curbing speculation building. The recent economic downturn caused builders to stop building and many new homes sat vacant through the early stages of 2009. When rates started to drop and buyers began to gobble up property that had been on the market for some time, the supply/demand ratio started to lead to higher demand and higher prices.

Rule #2
All borrowers will have to meet qualification standards for a five-year fixed-rate mortgage even if they choose a mortgage with a lower interest rate and shorter term (such as one- or three-year terms).
Current standards for mortgage qualifying are typically based on a lender’s three-year fixed rate (if you’re opting for a variable rate, home equity line of credit, or one-, two- or three-year fixed-rate product, which typically carry a lower interest rate). This qualifying standard has, in the past, been sufficient to protect consumers from rates increasing over the term (at least on paper). Essentially, the government is forcing people to prepare for a likely rate hike over the next five years.
Considering the average difference between discounted three- and five-year fixed rates is only between 0.30% and 0.49%, this should truly not have a drastic impact on the average mortgage applicant – if, in fact, the new rules intend to have mortgage applicants qualify based upon discounted rates. It is still unclear if the upcoming alterations are meant to have Canadians approved based upon “posted” five-year rates, which would mean a difference of over 2%!

Rule #3
The maximum amount Canadians can withdraw when refinancing their mortgages will be reduced from 95% to 90% of the value of their homes.
This final change will likely have the most impact on those Canadians who have a current government-backed insured mortgage and would like to take advantage of the equity in their home to do some debt consolidation in the future. In recent times, with rates at historical lows, it’s been advantageous for consumers to roll their unsecured debt into their mortgage to decrease monthly payments – so much so that the government has sought an end to this trend of high loan-to-value mortgages.
This does not, however, stop consumers from overspending and taking on large amounts of credit card debt. In some cases, the ability to borrow the equity in one’s home to pay off debt has saved people from bankruptcy and kept them in their homes. Hopefully this change doesn’t backfire on the government’s intentions.
Only time will tell if the government’s measures to curb spiking house prices and encourage equity savings will be a positive change for Canadians.
Prior to this announcement, there was wide-spread speculation that the government was going to change current mortgage policies to include a minimum 10% down payment, an increase from the current 5%, and a reduction in amortization from a maximum of 35 to 30 years. Luckily for first-time home buyers in Canada, these rumours have not proven true.
As always, if you have any questions about these new mortgage rules or your mortgage in general, I’m here to help!

If you’re self-employed, you may have a more difficult time obtaining financing for your real estate purchases than you encountered prior to the credit crisis thanks to tighter lending criteria in lieu of the recent recession. But if you can prove your income, show you’re up-to-date on your taxes and that you have solid credit, your chances are greatly improved.
There are essentially two types of self-employed or business-for-self (BFS) borrowers – those who can prove their income and those who cannot, and must instead use a stated-income mortgage product.
By providing the required documentation, you’re much more likely to be approved for a mortgage if you qualify based on your income. The trouble is that if you cannot prove your income, you pose a higher risk in the eyes of lenders. In mortgages, as in most other things, pricing is based on risk – the riskier the lender perceives you as a borrower, the higher the interest rate you will be required to pay on your mortgage.
Canada Mortgage and Housing Corporation (CMHC) offers default mortgage insurance for BFS clients through a stated-income mortgage product up to 95% loan to value (LTV) – meaning the down payment can be as low as 5% of the purchase price – but the income has to make sense based on your occupation. This is important, because the chances of finding lenders to fund this type of deal are significantly boosted if the mortgage is insured.
Lenders and insurers are well aware of the tax write-offs that BFS borrowers can leverage, but these deals are accepted or declined based on average incomes for specific fields, as well as your credit rating. It pretty much goes without saying that those with credit blemishes will have a tough time obtaining traditional mortgage financing if they’re self-employed.

Getting pre-approved
While BFS mortgage financing is viewed on a case-by-case basis, if you work with me to obtain a pre-approval, you can be confident you have access to mortgage financing and you will know how much you can spend before you head out shopping for a property.
It’s important to note, however, that there is a significant difference between being pre-approved and pre-qualified. In order to obtain a pre-approval, the lender fully underwrites the deal, whereas with a pre-qualification only the most basic details are considered.
Should a pre-approval and/or mortgage default insurance be unobtainable, the maximum mortgage amount you are likely to qualify for is between 50% and 75% – meaning you will need a much larger down payment.

Alternative financing
If you do not qualify for traditional financing all is not lost, since you may be eligible for alternative – or private – funding.
As a mortgage professional, I also have access to private investors who are willing to lend money to BFS individuals looking to obtain mortgages. Although you will pay a higher interest rate, this route may enable you to acquire funds to purchase a home.
Private financing is equity based, meaning that the lender’s decision will be based on a specific piece of real estate as opposed to just focusing on your credit score. Private lenders want to know that the property is marketable and that they will be able to easily sell it should the mortgage go into foreclosure.
When you get into the private-lending realm, not only are the rates higher, but the mortgage terms are also shorter – typically for 12 months at a time. If you do end up in a private mortgage, your goal should be to build up your credit so you can head back to a traditional lender within 12 months – where you will receive better interest rates and, overall, more mortgage options.

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