22 Sep

Time To Lock In Your Rate? Make sure you have an exit strategy!

Mortgage Tips

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Not worried about a strategy

Like many of you, I received a call last week, from my mortgage provider, asking whether I wanted to “lock in” a new 5 year fixed rate. The rate was a special offer and would only last for the week, so I would need to make a decision quickly, with little time to think about the consequences to my own mortgage strategy.

While it may appear that your financial institution is acting entirely in your best interests, this is only partially the case. While it is true that locking in or switching to a new fixed rate can help you control your costs, they are doing it to manage their own costs, not yours. It’s important to remember that each time a financial institution lends you money, it’s not their own money. Their strategy is to borrow the money from investors, depositors and other corporations in order to lend you the money. The five year fixed rate renewal they sign with you is backed up with a five year investment contract with someone else. Always.

When I started as a broker, the best piece of advice I got was from a former boss who said; “Before you sign up with someone, its always important to have an exit strategy, because things will change, often for the better, and you may need to get out of the agreement. Make sure you make it easy to do so. “

Having an exit strategy is just as important when signing a renewal or early renewal contract. The strategy is not so much about exiting the mortgage entirely, but ensuring you know and can use the existing features to your advantage. There are three specific features (termed ‘privileges’ and ‘penalties’ in the offer) that you should know and understand before signing that new contract;

A) Pre-Payment Privilege
For most of us, there is some time in our lives where a sum of money lands in our laps, perhaps a large bonus, severance, cash settlement or even a small inheritance. Knowing how much you can pay down, should you choose to, is vital. Depending on the lender, you may be limited to a 10 percent prepayment or as much as 20 percent. Some lenders specify the exact day you can make the prepayment, some merely say ‘anytime’.

B) Increased Payment Privilege
Again, at some time in our lives, most of us will leave one job for another that pays significantly more. In those situations we can certainly afford to increase our mortgage payments and should do. Do you know how much you can increase your payment and when? Again, it varies widely from lender to lender, for 10% on a specific day, yearly, to 20% anytime.

C) Early Payout Penalty
This is perhaps the most ignored potential cost in mortgage financing. As with the privileges, no two lenders calculate the penalty the same way. Its important to understand the differences. It can save you thousands.

Most people’s reaction, when we talk about penalties is ‘well I’m never going to pay out early, so it doesn’t matter. ‘ I don’t blame you for thinking that way, because that’s always my reaction too! But let’s walk through a “what if” and I’ll show you why its important to consider.

So… You have an existing mortgage in the amount of $480,000. Your lender’s representative calls you to say that because rates are going up, he’s calling all his clients to let them know that if you wish to early renew, they’re offering a fixed rate that’s actually a minuscule amount lower than you are paying now. Rates are going up and the offer is only guaranteed until the end of the week!

Because it’s actually well before the renewal date, there is a penalty, but they’ll add that on to the mortgage balance, no need to worry. After a couple of moments hesitation, you agree and you go in to sign at the branch. Overall, your experience with the lender has been very good.

Spool forward three years and your life is changing. You’ve become an expert in your field, people are noticing and suddenly, you are offered a dream job in another part of the country.

Its sad and exciting to have to sell up and move but you’re startled when you realize the payout penalty is $21,000. That’s a LOT of your hard earned equity to lose but you realize that you’ve already actually paid another $3700 in penalties when you renewed early. Now its $25,000! GULP!

I know you realize that this is a worst case scenario but it can potentially happen to any one of us. The key is not avoiding these costs, but by making informed choices, avoid paying any more than you have to. By being aware and making one simple change, your penalties in our previous scenario could be about $7500 – a savings of $17,500.

You can read more about how some lenders (not all ) calculate their penalties here.
As always, please feel free give me a call if you have any questions.

JB

Oh, one more thing, if there is a voice in your ear whispering, ‘don’t worry, they’ll never charge the penalty’ or anything like that, don’t listen. Remember, the lender actually borrowed the money to lend to you and signed a contract….

 

27 Jul

Avoiding “Sticker Shock” When It Comes to Mortgage Renewal.

General

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Imagine that, a few years from now, the time has come to renew your mortgage.

Several years back, you got a $350,000 at the then great rate of 2.24%. Your mortgage payments are $1522 per month.

Because we are now in what the financial brainboxes call “ an escalating rate environment “ – normal people just say rates are going up – when you open your renewal notice you might encounter the same feeling you get when you look at the price of a car you like.

When you actually do look at the renewal notice, you see that the remaining balance on your mortgage is now $294,662, the new ( very competitive rate ) is 3.25% and that the new payment is $1668, actually $150 dollars a month MORE than you were paying previously. You think “WHAT THE….???”

This type of sticker shock is a new sensation to an entire generation of Canadians. Brokers are fond of talking about the fact that rates have not moved in 7 years but we rarely talk about the fact that rates have been trending down for more than twenty years and chances are, if you’ve had a mortgage for any time during that period, the payment at renewal has always been lower than when you started out.

‘Well, what’s to be done’, you ask? ‘How do I avoid “sticker shock”?

The key to avoiding that sinking feeling is to increase your payment slightly every year. You can find out how much to increase it during your Annual Mortgage Review. By increasing your monthly payment by even 2% a month, you can potentially avoid that sinking feeling  – and pay off your mortgage even faster!

But wait; “Annual Mortgage Review? Qu’est-ce que c’est”, you ask.

An annual mortgage review, done with either your mortgage provider’s representative or your own mortgage representative ( i.e. your friendly Mortgage Professional) is just a quick check up to discuss what the current balance is, how things are going and do a quick review of your early payment privileges, increased payment privileges and potential prepayment privileges.

Its best to have these annually because , well, the average human needs to be shown the same information seven times to learn it – save time and start today.

Seriously, if you feel like you need to do annual review and need help, just give me a call.

JB

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

30 May

Rocket Science; 5 Simple Steps to Owning Your Own Home.

Mortgage Tips

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Home

The view from my sisters’ home.

Often, it can seem like the route to owning your own home can seem like a trip to the moon and back.

Really though, it comes down to five key steps:

1 – Manage your credit wisely.
If there is one thing that will gum up the purchase of that perfect home, it’s an unwise purchase or extra credit obtained. Keep your credit spending to a minimum at all times, make every payment on time and most of all pay more than the minimum payment. Remember that if you just make the minimum payment on your credit cards, chances are you will still be making payments 100 years from now..

2- Assemble a down payment.
At first glance, the challenge of finding a down payment can seem insurmountable. In fact, you just need to consider all the sources for down payment funds. yes, you will have saved some but remember you can also, in some situations, use RRSP funds, grants ( BC Home Equity Partnership for example ) and non traditional sources like insurance settlements, severance and of course, gifted funds from a family member. Don’t forget that you’ll need to demonstrate that you’ve had the funds on deposit for up to 90 days and also that you have an additional one and a half percent of the mortgage amount for closing costs.

3- Figure out how much you can afford.
Its at this point that most people usually stop and scratch their heads. Some even try and tough it out, using the raft of online calculators to figure it out but new mortgage rules can make even that a challenge.
If you talk to a mortgage broker ( like me! ) though, they can help you figure it out and even go as far as getting you a “pre-approval” from a financial institution. This can give you the confidence you need to actually start looking around.

4- Figure out what you want.
You’ll want to make a list of things your new home has to have and what the neighbourhood has to have. Things you want to think about are the things that are important to you now; is there access to a dog park? Is there ensuite laundry? Divide the list into things you can’t live without and things you’d like to have. It’s way easier to look when you know what you want to look at.

5- Look with your head, buy with your heart.
The final step is, with the help of a realtor, look at properties that meet your requirements. Yes, the market is a little frenzied at the moment, but remember, if your perfect property is sold to someone else, the next perfect property will soon appear.

When you do finally buy, chances are, you’ll buy with your heart. My sister Noona moved to London some years back and after settling in, decided to buy. Her list was fairly lengthy, one of the key elements was being able to walk to work. In a market similar to what we face now, she found a property that met most of her requirements. In the end though, she bought with heart, mostly because of the view from the balcony.

The decision which home to buy is a tricky thing, it should be made with your head and heart. Deciding, while balancing what you think and feel, really is rocket science.

I know that this may seem to be an oversimplification but really, the thing that complicates the process is your own emotions – all of the stress that comes along with making a life change can make the process challenging.  If you need help or advice in any one of the stages, just give me a call.

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.

20 Feb

Leaseholds, Part 4, Recreational Properties with an occasional Sasquatch.

General

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For most of us, the idea of owning recreational property in BC’s Interior is both alluring and hard to imagine. Leasehold opportunities exist more often than you would imagine.

If you are thinking about it, there can be some affordable options if you considering owning leasehold property, either on Crown Land or held by a private association or corporation, such as the parcel of leases around Horne Lake, on Vancouver Island.

The advantages with Crown Land leaseholds are that they are are always renewable ( the government has never as yet, refused to renew a Crown land lease ) where the land is used for residential purposes.

As well, the payments are calculated based on an annual payment of 3% of the assessed value and the leases written over a 30 year period. For more information on Crown Land visit Front Counter

As with all recreational properties, the challenge is finding a lender. Its best to be prepared with a fairly hefty equity stake, 35% or better puts you in a position to find a reasonable rate and flexible terms.

The Horne Lake Sasquatch

The first resident of the Horne Lake area was reputedly a local sasquatch. The Victoria Colonist reported on December 14, 1904 that four hunters saw a ‘hairy wild man with long matted hair and a beard’ racing at ‘tremendous speed’ through ‘unimpentrable undergrowth’.

As with much of our recreational land, the lake itself was opened up when logging began in the late 19th century. Ownership of the land itself changed many times over the last century, with some took to squatting on its shores during the 1930s.

Early in the 1960s, a German Prince acquired ownership of the lands and after initially attempting to have the cabins removed, agreed to lease back the land to the cabin holders.

In 1999, the families flagging fortunes forced the sale of the land to a local development corporation.

Subsequently, the land was sold to the cabin owners association, who have worked hard to make the community a success and to ensure that it meets local planning, environmental and fisheries requirements.

7 Feb

Leaseholds, Part 3 , Native Lands

Mortgage Tips

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As convoluted as the False Creek Leaseholds are, their situation can be much easier to understand and assess than Leaseholds on land held by our Indigenous peoples.

I say “held” because there are some important distinctions on how those lands are treated. Other than lands subject to modern treaty agreements, most Native Lands are held “in reserve”. This means that the land is not truly under the control of the Indigenous nation settled there.

While things are changing, very slowly, in the past, treaties made land use very restrictive.

In the case where leasehold lands are “on Reserve”, the ambiguous ownership has dictated that the lease payments be held artificially low, not in line with the true land value. Attempts to redress this have resulted in lengthy court battles and hard feelings, because while the native band hold the land, they don’t technically own it or control it.

With the progress made in modern treaty negotiations, several systems of Indigenous landholding are now in place. They are:

Lands held In Reserve.(Land management guided by the Indian Act).
Self Government First Nations Land Registry
Indian Land and First Nations Land Registries
Fee Simple ( the most commonly used title holding method for the rest of Canada)

By way of an example of a leasehold that works, lets look at the Tsatsu Shores development.

In 2004, the Tsawwassen First Nation signed a new treaty and became self governing. As part of the treaty, they took Fee Simple Ownership of their lands and now on them outright. Their own laws mean that only First Nations members can own the land however, an oceanfront development now exists on a strata leasehold basis.

Because the First Nation actually owned the land, they could partner with a developer to manage the project. The result has been a new opportunity for both the band and homeowners.

Because the properties are on leased land, the acquisition cost is lower than you might think.

Just a quick note about financing, lenders prepared to consider financing properties on leased land will generally require the financing to be default insured, because of the added layer of risk. If considering the opportunity, remember that you will need to qualify under the new stress testing rules as a result.

As always, if you have any questions, need help or would like to run through some scenarios, please call or email.

For more information on the Tsawwassen First Nation, go here.

Regards,

JB

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