5 Jul

Buying a home? One simple secret to increasing your buying power by $100,000.

mortgage finance

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Mortgage financing

My other job… buying fishing gear.

With new mortgage rules in place since October, 2016, housing affordability is even more of a challenge than it was, particularly in areas like Vancouver.

There are, however, actions you can take today to increase your buying power.

To begin with, let’s start with some easy math; for every $100,000 you borrow, the monthly payment is about $450.00.

Based on that, I know that if you make $85,000 a year, regardless of whether your down payment is 5% or 50%, you could potentially afford ( and qualify for ) a $600,000 mortgage. Payment on that mortgage by the way is about $2700 a month, potentially as much as you’re currently paying for rent.

I say potentially, because during the course of our conversation, you tell me about your Audi Q7, which costs you $900 a month. It’s a nice car, but that’s the equivalent of a two hundred thousand dollar reduction in your buying power.

Further on into our conversation, the one that really stings… you have $15,000 in credit card debt.

Unfortunately, that’s another $100000 from the bottom line… your maximum mortgage is now $300,000.

‘Hey, wait a minute! – That’s only fifteen grand, the payments are only $150!’, you say.

Well, that’s correct, except that when creditors are calculating debt servicing, they use a 3% payment (what it actually was back when I had black hair) and poof! The payment is $450.

So, want to increasing your home buying power by $100,000? Eliminate the $15,000 as quick as you can and poof!

( If you want to increase you buying power even further, downsize the vehicle and cut the payments in half – another $100,000 – poof! )

As always, if you have any questions, need help or would like to run through some (real) scenarios, please call or email and poof! – I’ll be there to help.

Regards,

JB

Jonathan Barlow
778-230-2572
jbarlow@dominionlending.ca

1 May

Vancouver’s Rental Market Needs Carrots, Not Sticks.

General

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rentals

Summer is coming

At any given time, in every housing market in Canada, there will be a segment of the population that cannot afford to own their own homes, regardless of any discussions about affordability.

We all want to live within a reasonable distance of where we work, no matter what we do, and one of the ways for that to happen is to rent. The rental market in this city, as with many others, needs to be recognized as a vital part of the housing spectrum. Unfortunately, it appears that all levels of government do not consider it to be so.

Rental real estate Investors can be roughly divided into two groups; the commercial ventures, that own apartment buildings, multiple units etc., and the limited door investor, usually an individual investment property owner . The key difference between the two is the commercial business is in it to cash flow, earn a profit. The limited door investor – perhaps your next door neighbours – a couple who owns their own home and perhaps a condo downtown that they rent out, is not in it for revenue generation. Rather they are in it for wealth accumulation instead of profit. The theory is, as long as the rental pays for itself, their “business” is a success because their key profit driver is the increase in property values.

Right now each level of government uses various “sticks” to drive the rental market, although it appears there is little thought given to the consequences of doing so, particularly when it comes to affordability in the housing market.

The Federal Stick; Stand alone rental properties are no longer eligible for default insurance. Financing options are now limited to half the lenders previously available and all are more costly than even a year ago.

The Provincial Stick; The BC Home Equity Partnership Program.

The Municipal Stick: Combining a 15% foreign buyers tax with a 1% vacant property surtax.

In so many ways, each of these “sticks” make sense on their own, however as a combination, they do nothing to make either rental or non rental housing more affordable. In fact they do the opposite.

Removing the default insurance option from what is a vital part of the rental market not only limits the number of new rental units coming on to the market but also endangers existing rental housing, increasing costs and not allowing owners to refinance repairs and refurbishment.

Ignoring the rental market in favour of offering interest free loans for downpayment also ignores the the fact that a rental housing shortage will drive competition for what today is barely affordable first time housing and will actually increase prices.

If a 15% foreign buyers tax has done nothing meaningful to cool the housing market because foreign buyers are prepared to pay a premium to own here, how will an additional vacancy surtax address that problem?

Perhaps we should consider the following “carrots”?

1. Return default insurance coverage to the stand alone investment (rental) housing sector.
2. Develop a provincial rental housing policy, including tax concessions for commercial, multi unit residential rental projects.
3. Rebate 3% annually of the Foreign Buyers tax for five years, provided that the property is occupied during the entire term ( rental or owner occupied ).
4. Give planning preference and municipal tax incentives for rental housing.

Why am I, a Mortgage Professional, talking about the rental market? Its pretty simple; with an effective, stable rental housing market, competition slows to a more measured pace in the first time homebuyer’s market and demand decreases. As demand decreases, prices moderate. ‘See where I am going with this?

10 Apr

Managing Consumer Debt: The Side Door Key To Your New Home.

mortgage finance

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With all the rule changes sweeping the mortgage industry, an important message seems to be getting lost – the one that shouts at you like your grade 10 gym teacher – Manage your consumer debt!!!

Yes, you’ll need to qualify at 4.64%- the stress test rate – for that new mortgage and ensure that your debt servicing is below 39% ( GDS) and 44% (TDS), but what does that really mean?

Well, GDS or gross debt servicing, is the calculation of how much of your income will go towards paying your shelter costs (mortgage, taxes, heat and condo fees mostly) compared to your gross income. ( My friend and co-worker Ralph E. once said – “I know its gross, you don’t have to keep pointing it out .” ) You have little control over GDS beyond making sure you’re buying something affordable.

TDS or total debt servicing is the ratio of how much you spend paying your debts versus your gross income ( that word again!). This includes the mortgage payment but it also includes loans, lines of credit and credit cards and while your debt may seem manageable, let me show you just one example of how it might not be.

Say, for example you make $65000 a year, have a steady job, worked for a number of years and saved $70000 ( with a little help from the bank of mum and dad ) towards your first place and no other debt.

By all accounts, you should- and do- qualify for a $330000 mortgage, but let’s add just one bit of consumer debt to the mix and see what happens.

When you got out of school, you did what most of us do; you ran up some credit card debt. Since then you’ve managed your money well and you’re left with one credit card as your one piece of consumer debt. It has a $10000 balance and more often than not, you pay more than the minimum payment of $100 but you do use the card regularly, so the balance never seems to come down.

The problem is, if you continue to make the minimum payment, it will take over 100 years to pay off the balance. What’s worse is; when we’re calculating the debt servicing for your new mortgage, we don’t use 1% ( the $100 minimum payment), we use 3% ( $300, what minimum payments used to be ).

Using the 3% payment calculation method raises your TDS by 5.5% and guess what? That’s correct, you no longer qualify for a $330000 mortgage. In markets where property values are going up, its critical to maximize the amount you can borrow, so this is not good news.

If you’re reading this and you’ve been thinking about buying a new home or your first home, it’s easy to feel a little crestfallen and think it will never happen. I urge you – DO NOT feel that way – your parents and everyone you know who owns has faced similar challenges.

I said that you have little control over GDS but the good news is that you do have control over your total debt servicing – it’s just a matter of carefully managing your consumer debt and being aware of what you are spending your money on. The first thing to recognize is that its your money and you need to take control of who you give it to. There is some great information on managing your debt here.

Even if your plans include a home purchase a few years off, now is the time to get the help you need from a Mortgage Professional – Just give me a call!

24 Mar

Why Cash Flow Matters In The World of Rental Properties.

mortgage finance

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In the world of Commercial Rental Properties, there’s a saying; “Cash flow is king”.

Because the Business that owns the property is errr, in business, it follows that things need to be run at a profit. That means that appreciation in value of the property (the asset) doesn’t factor in to the profitability of the business.

The method of calculating profitability is simple really; deduct real and projected expenses from revenue ( i.e. the rent) and the business is left with positive cash flow ( or profit ). If the cash flow is negative, then the business will try to better manage its costs, increase its revenue or dispose of the asset and try again somewhere else.

Because its a business, decisions are largely made based on the numbers – there’s little emotion involved in the decisions because the business owners realize the risks they are taking on and what their tolerance level is for that risk.

For a long time – because stand alone rental properties could be default insured – lenders who gave you and I mortgages on rental properties, considered all your cash flow personal and rental as part of the ‘business’ and made allowances for the individual owner. This was tacitly approving the idea that asset appreciation ( i.e. increase in property value) was part of the goal.

With the rule changes announced late last year, the government indicated it is no longer prepared to insure stand alone investment properties for individuals. The rationale being, I think, that anything but a self supporting rental was too high a level of risk.

Note that I said “Stand Alone”, the government actually enhanced and clarified their support for insuring properties that you occupy that contain additional rental suites.

Financing for Rental or rather “Investment” Properties is certainly still available though lenders providing uninsured (default insurance) Conventional Mortgage financing but, because the financing is deemed riskier to the lender, rates are higher.

More importantly, rental properties are now subject to similar testing to what is completed in the commercial market. In essence, the property needs at least be self sustaining as a stand alone business. Your broker will likely need to complete a Rental Worksheet similar to the one below in order to assess the viability of your rental financing.

Here’s an example scenario with three different down payments:

 

A couple of things to note from this scenario; a) I used a $400,000 value for the property – a not unreasonable amount for the lower mainland and b) the gross rents have been calculated using an amount of $1900 per month, which is perhaps higher than could be expected for all but a downtown rental suite. Both the rental amount and the property purchase price are perhaps, optimistic.

As you can see from this model, rental properties now require more of an equity commitment from you to make them viable. If you want to play around with your own worksheet, one is available here.

So in the current world, if you’re interested in owning and financing a rental property, there are a couple of challenges that also turn out to be opportunities. In the Japanese business world, challenges or complaints like these are known as Golden Nuggets.

Golden Nugget #1 – The rate is higher, BUT you can offset this cost against your tax obligations.

Golden Nugget #2 – Your own investment is higher BUT the property is immediately profitable or at least self sustaining.

 

As always, if you have any questions or need any help please give me a call.

 

JB

15 Mar

Why They’re Not Really In The Mortgage Business

mortgage finance

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Mortgage financing

My other job…

Often, when we talk to you about mortgages, Mortgage Professionals will provide you a set of choices involving banks, credit unions and single service mortgage providers called a “Monoline” and a recommendation.

Many times, if its a good fit, we recommend a Monoline, as your first option.

Its important to recognize the differences between the two, Monoline and Bank, because they are very different businesses and how they approach mortgages can have a very significant impact on you.

Monoline mortgage companies are in the business of providing nothing but competitive mortgages to you, your family and friends. It’s important to stress that they offer competitive mortgage product. As a group, they provide great rates and more importantly, flexible mortgage repayment terms, all in an effort to be competitive.
They want your mortgage business because its their sole business line and they want to do well, both for you and for their investors.

The big banks are not in the mortgage business. They are in the financial services business. Its very important to understand that their focus is not about being competitive in the mortgage business.

“Huh?” I know, it doesn’t seem to make a lot of sense, but let me explain…

When you work at a bank, you hear all the time that the bank doesn’t make any money on its mortgage portfolio. You come to see how true this is when you see the incredible focus that a bank has on minimizing costs, how it’s almost impossible for you to step out of the normal process to help clients with special circumstances.

Because maximizing profit is the true goal of minimizing costs, every bank follows the “Golden Mean”.

In art, the Golden Mean is a strict proportional guideline for creating great art.

For a bank, the Golden Mean of profit is the strict proportion of average products and services per client. Their golden number is that each client has an average of more than of 2.75 products and services. For example, if you have a chequing account, a mortgage and a Visa, you’re profitable for the bank. Move any one of those and you’re not profitable anymore.

The intense focus on profit and managing costs means you pay more for mortgage financing. Not on something as obvious as interest rate, but on the options. Say for example you’re in a fixed rate mortgage and you need to pay out your $350000 mortgage out before the five year term expires. Its not that uncommon, probably two in five of you reading this will do it.

If you were to pay out two years into a five year term, depending on who your dealing with, the penalty can be a little as $1500 or as much as $13000 depending on the lender you choose. Banks typically charge higher penalties because they’re not in the mortgage business – they don’t need to be competitive and also as a way to closely manage costs.

This post and some of the recent articles you’ve seen floating around may lead you to think that your average Canadian Bank is a manifestation of Mr. Robot’s Evil Corp. They’re not; managing costs is what drives profit for them – saving 10 cents means 3 dollars more profit – so even phone to phone contact for them is considered an extra cost.

The most important thing for you to remember is that they’re not really in the mortgage business, that’s why you need to connect with one of us – to understand all your options.

If you want more information on this or mortgage financing in general, please give me a call today.

2 Mar

We work for you and only you.

mortgage finance

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Five best reasons to work with a mortgage broker. Part 2

A Comforting blanket.

We work for you and only you.

Every time you seek credit or investment advice from a financial institution, the person you speak to is in a conflict of interest.

The conflict of interest exists because they are paid by the financial institution to sell you that institution’s products. They’ll take the time to try and find the appropriate product but if it doesn’t quite fit your needs, then you will be the one to compromise, not them.

If you’re shopping for mortgage financing with your bank, you may never be made aware of the conflict because the bank and its mortgage representative are not required to disclose the conflicts to you.

When you engage a mortgage broker, we work for you and only you. Our aim is to provide solid advice, a repayment strategy and ultimately the right mortgage financing. The ‘right’ mortgage financing might mean a five year fixed term mortgage, or it may mean a combination of a variable rate first mortgage and a smaller second mortgage. Its all about what’s right for only you.

Most of us access about 40 to 60 different lenders offering a wide range of mortgage products, one of which will be ideally suited to you.

Because we’re compensated by the lender you choose, we’ll be up front about the nature of that compensation to you.

Really, the service we provide comes down to choice; choosing the right mortgage financing from a range of lenders and products, or having only one choice. You can learn more about your options, here.

I imagine if you’ve gotten this far, you really want to be in control of your finances and be aware of your choices.

If that is the case and you do need help with or want your choices, please contact me.