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What is Shadow Lending? The key things you need to know.

What is Shadow Lending? The Key Things You Need to Know Like “shadow flipping,” the term “shadow lending” gets a lot of negative press. What it means and when it can be helpful. As seen in REW.ca

Over the last few years, the media has done a great job of telling wild stories about how so-called shadow lenders are seducing Canadians with bad loans, only to foreclose and steal their houses. The term “shadow” evokes all the right imagery: the back-alley deal, thugs with pipe wrenches, extortion and envelopes full of money.

The expression “shadow lending” (or “shadow banking”) is actually quite vague. It is a catch-all phrase that usually describes any practice of private lending done outside the walls of a traditional bank. So, if your parents loaned you $50,000 for a down payment, they are shadow lenders.

The Bank of Canada states,bank Shadow banking refers to a set of activities, outside the formal banking system, that carry out similar functions to those performed by banks.” It goes on to say that “while the term ‘shadow banking’ tends to suggest something secretive or illicit… on the whole, shadow banking serves a useful purpose.”

And one such useful purpose is increasing the choice of mortgage products for consumers.

Having more choices is one of the major benefits of working with a mortgage broker. As it becomes more difficult to secure traditional mortgage financing, due to government intervention, the alternative lending space is stepping up and creating solutions for clients who would otherwise be turned away from homeownership.

In other words, while the banks continue to narrow their qualifications, alternative lenders (private mortgage lenders) are filling the void and creating products priced based on risk. Sure, these products might come at a higher rate than a traditional mortgage. But ask yourself, if the bank turned you down for a mortgage for whatever reason, wouldn’t you want to at least be able to consider more options?

Here’s when getting a private mortgage makes sense:Private-Mortgage-min

  • You are purchasing raw land or a unique property that traditional lenders won’t touch because it’s outside their lending criteria;
  • You are looking at buying a property to flip or a home that is in major disrepair, and need the funds to do the renovations;
  • You have been recently laid off or have lost your job for another reason, and you need money to tide you over while you are looking for a new job;
  • You need access to equity in your home and the penalty to break your current mortgage is too high;
  • You have credit issues such as a consumer proposal or bankruptcy and it is preventing you from getting a mortgage for the full amount that you need from a traditional lender and you need a “top up”;
  • You need to consolidate high interest debt, and due to bruised credit, you have been turned down by traditional lenders;
  • A divorce, illness or some other life-changing event has had a major negative impact on your credit rating or low income, and you need mortgage financing until you get back on your feet;
  • You need to take out equity from your property to get back into good standing with an existing mortgage that is in arrears, power of sale or foreclosure;
  • You are interested in purchasing a new home, you have a sizeable down payment, ideally at least 15% of the property value;
  • You have an existing property with a small mortgage that leaves you with a fair amount of equity in your property. Ideally you want the total of your existing mortgages and the new one to be at least 85 per cent of your property value or less.

Most private lenders will not provide loans that go beyond a loan to value (LTV) ratio of 75 to 85 per cent.canadalend_faq_btn

The following is a list of some of the questions you need to ask when dealing with a private mortgage lender.

Is there a loan document? Just like banks, private mortgage lenders should provide a loan document that details the terms and conditions that are listed below. You will know exactly what you will be committing yourself to by seeking the legal advice of a lawyer to represent you.

What are the term(s)? Typically, private lender mortgages only want short-term mortgages. Therefore, you should find out how long the term it is for. Normally they are from one to two years. The important thing to consider is that at the end of term you will be able to get refinanced. If you feel that your situation may not improve by the end of the term you should look to negotiate a longer term.

What is the interest rate? The rate is important as it forms the basis of your monthly payments. You might also consider what the renewal interest rate would be if you need to renew with a private lender, and you should get this rate beforehand. This is critical if at the end of the initial term, you are still challenged with refinancing options.

What is the amortization period, or is it interest payments only? The amortization period is how long it will take you to pay off the mortgage. Most private lenders will require you to make interest payments only or might have a longer amortization period (e.g. 35 to 40 years) in order to keep the monthly payments lower.

Is there a penalty for paying off the mortgage earlier? There are private lenders that offer open-term mortgages, which means you can pay off the mortgage at any time during the term without paying a penalty. While other offer closed mortgages and if payed of earlier, you would typically have to pay a three-month penalty interest.

What happens in the event of default? One of the most common defaults is missing a mortgage payment. Typically, mortgage lenders need to advise you that you are in default and need to give you a certain period of time to take care of the default. Like traditional lenders, if you do not take care of the default, it can lead to foreclosure.

Is there a cost-of-borrowing disclosure statement? Along with the loan document, there will also be a cost-of-borrowing disclosure statement, which means the lender will need to provide you will full disclosure on the costs of borrowing.

Will the private lender be registered on the title of your property? Just like your traditional lender, the private lender will register their interest on the title of the property.

Are the execution of the documents signed at your lawyer’s office? Yes, you will need to have your own lawyer and the private lender will have their own lawyer as well. Be advised that, you will be responsible to cover the cost of both yours and their lawyers’.

So, how do you protect yourself from falling victim to shadow lending (if, in fact, you can “fall victim” at all)? Actually quite easily. Don’t buy into the media hype!

After that, if you don’t understand the terms of a mortgage, ask questions. And, if you still don’t understand, ask more questions. At that point, if you still don’t understand, seek legal counsel. And if you don’t like the terms of the mortgage presented to you, simply don’t sign. Ultimately, no one is forcing you to sign mortgage documents.

At the end of the day, you should always seek professional advice and make informed decisions. It’s your money and your property, you have every right to spend it, or not, and sell it, or not, how you see fit.

 

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Frequently asked questions when buying a home

As seen in the Metro Vancouver New Home Guide.

What do lenders look at when qualifying me for a mortgage?

Most lenders look at the following factors when determining whether you qualify for a mortgage:

  • Income
  • Debts
  • Employment History
  • Credit history
  • Value and marketability of the property you wish to purchase.

How much can I qualify for when buying a home?

Conceptual image - percent growth

Conceptual image – percent growth

In order to determine the amount for which you will qualify, there are two calculations that are used. The first is your Gross Debt Service (GDS) ratio. GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs and strata/condo fees, if applicable). Generally speaking, this amount should not be more than 35% – 39% of your gross monthly income. For example, if your gross monthly income is $4,400, you should not be spending more than $1,716 in monthly housing expenses. Second, your Total Debt Service (TDS) ratio is calculated. The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Generally speaking, your TDS ratio should be no more than 42% – 44% of your gross monthly income. The GDS and TDS will depend on your credit. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, you may want to get pre-qualified by a Mortgage Expert. This will help you stay within your price range and spend your time looking at homes you can reasonably afford.

How much money do I need for a down payment?

The minimum down payment required is 5% of the purchase price of the home when you are an employee. When you are self-employed it will depend if you are qualifying based on what you are declaring on your income tax then it will be 5% and at least 10% down payment when you are self-employed and qualifying with an “estimated” gross income instead of the incoming showing on your income tax return. In order to avoid paying mortgage default insurance, you need to have at least a 20% down payment

If I86809937 don’t have the full down payment amount, what can I do?

There are programs available that enable you to use other forms of down payment, such as from your RRSPs, or a gift from a parent, child or siblings. Also, you can borrow the down payment from a line of credit, loan or credit cards. However, in order to qualify you still have to be within the TDS ratios as mentioned above.

What else do I have to pay to purchase a home?

You will have to pay for the closing costs. The lenders require you to have in your bank account at least 1.5% of the purchase price (in addition to the down payment) strictly to cover closing costs. You must have this amount but it doesn’t mean you are going to spend it. The following are some of the closing costs:

  • Legal costs
  • Property tax adjustments
  • Strata/ condo fee adjustments (if applicable)
  • Cost to register property in land title office, etc.

What would be my mortgage payments?

Monthly mortgage payments vary based on several factors, including: the size of your mortgage; whether you are paying mortgage default insurance; your mortgage amortization; your interest rate; and your frequency of making mortgage payments.

What is better a fixed or variable rate mortgage?Discount

The answer to this question depends on your personal risk tolerance. For instance, you are a first-time homebuyer and/or you have a set budget that you can comfortably spend on your mortgage, it’s smart to lock into a fixed mortgage with predictable payments over a specific period of time. If your financial situation can handle the fluctuations of a variable rate mortgage, this may save you some money over the long run.

What is the best interest rate that I can get?

Your credit score plays a big part in the interest rate for which you will qualify,as the riskier you appear as a borrower, the higher your rate will be. Rate is definitely not the most important aspect of a mortgage, however, as many rock-bottom rates often come from no frills mortgage products. In other words, even if you qualify for the lowest rate, you often have to give up other things such as pre-payments and portability privileges when opting for the lowest-rate product. Remember not to focus on the lowest interest rate but on finding the best mortgage with the most favorable terms and rate. While you might end up having a lower rate, it can end up costing you thousands of dollars of unnecessary costs in the long run.

What credit score do I need to qualify?

Generally speaking, you are a prime candidate for a mortgage if your credit score is 680 and above. The higher you score the better, as you will have more options and advantages. These days almost anyone can obtain a mortgage, but the key for those with lower credit scores their options will be more limited and interest rates could be higher. But don’t worry consult a Mortgage Expert to see how they can help you in obtaining a mortgage.

What happens if my credit score isn’t great?

There are several things you can do to boost your credit fairly quickly. Following are five steps you can use to help attain a speedy credit score boost:

  1. Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they are below 50% of your limits.
  2. Limit the use of credit cards. Racking up a large amount and then paying it off in monthly installments can hurt your credit score. If there is a balance at the end of the month, this affects your score.
  3. Check credit limits. If your creditor is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your application.
  4. Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. Use these cards periodically and then pay them off.
  5. Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.

To get more details about these and other questions you might have, give us a call and we will be able to analyze your personal situation and provide you with more information so you can make an informed decision on buying your home.


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Difference between pre-qualified and pre-approved? – part 1

Determining how much house you can afford involves plenty of number crunching. Jorge and Alisa Aragon explain two stages on the road to mortgage approval – As seen in REW.ca 

Q: What is the difference between pre-qualification and pre-approval for a mortgage?

A: Pre-qualification is a relatively simple process where the mortgage broker or bank estimates both your borrowing power and the maximum amount of mortgage you can carry. This is done by providing information about your financial situation, such as your income, assets and debts. This easy and quick step doesn’t take into account your creditworthiness or involve a thorough analysis of your financial situation. It’s simply a place to start to estimate the price range of homes that you could qualify for. As mortgage experts, we do this during our initial meeting to give you a rough idea how much you will be able to qualify for. Pre-approval is a more in-depth analysis of your financial situation, as you will complete an application and provide consent for the lender to obtain your credit report. At this point, the lender has more detailed information on your income, assets and liabilities, and your information has been checked and verified. Your credit report has been pulled to learn about your credit score, history and credit worthiness. Based on this information, the lender will issue a pre-approval letter letting you know what you are likely to be approved for a mortgage and the amount you may be approved for. The pre-approvals can also guarantee current mortgage rates for up to 120 days. It is important to acknowledge that you are not guaranteed to get a mortgage if you are pre-qualified or pre-approved. Many things can happen during the process, and some lenders may give a pre-approval letter without actually verifying your information. Talk to a mortgage expert to get the pre-qualification/pre-approval process started and get you on the road to homeownership.


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How to Make Your Mortgage Tax Deductible and Increase Your Net Worth

If you have home equity, there’s a neat method to use it to make investments and write off the mortgage interest. As seen in Rew.ca.

For US homeowners, mortgage interest is automatically tax deductible, but for Canadians, the write-off is not so straightforward. However, there is a way for you to deduct your mortgage interest while increasing your wealth, an approach known as the “Smith Manoeuvre”.

In order to make your mortgage interest tax deductible, homeowners must be able to prove that the money is being reinvested and is not being used for personal expenses.

A properly structured mortgage-centric tax strategy has several key elements – the most important of which is a multi-component, mortgage or home equity line of credit (HELOC). You will need a readvanceable or line-of-credit mortgage that lets you continuously extract equity as you pay your mortgage down.

Every time you make a payment and reduce your principal, you then immediately extract that equity and add it to your investment account. Since you have been able to deduct your mortgage interest, at the end of the year you will generate a tax refund that you can use to make a lump-sum payment on your mortgage –which makes even more funds available for investment.

It’s best to have a single collateral charge with at least two components – usually a fixed-term mortgage and an open line of credit that can track and report interest independently. This is absolutely essential under Canada Revenue Agency (CRA) rules and guidelines. In addition, for the interest payment to be tax deductible on any money borrowed for investment purposes, it must have a reasonable expectation to be able to produce an income.

Second, the strategy must employ conservative leverage-investment techniques – which is why a financial advisor must be involved in order to comply with federal regulations. The financial advisor should be a Certified Financial Planner (CFP) who is experienced in leveraged investing and able to actively monitor a homeowner’s portfolio on an ongoing basis.

Homeowners who opt for a tax-deductible mortgage interest plan make their monthly or bi-monthly mortgage payments the same way they would when making any type of mortgage payment. The payments go towards reducing the principal amount of the mortgage, creating equity; which is subsequently available to be borrowed on the line of credit. From there, the equity available in the line of credit must then be transferred to an investment account, which can be done automatically by your Certified Financial Planner.

Essentially, the homeowner is borrowing from the paid portion of the mortgage for reinvestment purposes.

On average, a typical 25-year mortgage can become fully tax deductible in 22.5 years.

The Ideal Client

Ideal borrowers for an advanced mortgage and tax strategy are typically professionals or other high-income earners who have a conventional mortgage, and have at least 20 per cent of the cost of the home to put towards a down payment, or who have built up substantial equity.

As high-income earners, their total debt-servicing ratio will be quite low and they will have excellent credit (680+ Beacon scores). These borrowers are financially sophisticated homeowners that are keenly interested in establishing a secure financial future and comfortable retirement. They also have good investment knowledge.

The Risks

The financial benefits of tax-deductible mortgage interest are indisputable and justify the risks to the right borrower. That said, a problem can arise if a homeowner spends the funds as opposed to reinvesting them. As well, any tax refunds should be used to pay down the mortgage as quickly as possible – thus making as much of the interest payment as possible tax deductible.

The short-term financial risk is liquidity (sometimes referred to as cash flow risk). Cash flow risk addresses the possibility that interest rates will sharply drive up the cost of borrowing at the same time as markets falter, resulting in a negative client monthly cash flow for a brief period of time.

This short-term risk is typically only prevalent in the first two to four years because, after this period of time, the homeowner has stockpiled enough equity through annual tax refunds that other liquidity options exist and the risk is fully mitigated.

Liquidity risk varies widely based on the balance sheet strength of the homeowner. Highly qualified homeowners are easy to manage as these borrowers have no difficulty meeting the short-term cash flow demand should the need arise.

Combining this tax deductible mortgage with a sound investment strategy can significantly increase your net worth over the long term. Talk to a mortgage expert for a free analysis of how the Smith Manoeuvre can work for you.


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Your cellphone account can impact whether you’ll be approved for a mortgage.

Equifax and TransUnion are the two main credit reporting agencies in Canada. They collect all the data on your loans, lines of credit and credit cards to create your credit report and calculate your credit score. This information is then used by lenders—including mortgage lenders—to determine whether you’re a good credit risk.

Recently, both credit reporting agencies started including cellphone accounts in their credit reports. This means if you make a cellphone payment after the due date, it appears on your credit report and reflects negatively on your borrowing profile. Even worse, if you allow your cellphone account to go delinquent and it’s sent to a collection agency, not only does this appear on your report, it can also reduce your credit score. Mortgage lenders use this information to make underwriting decisions. Therefore, having a negative record with your cellphone provider can actually impact your likelihood of being approved for a loan and increase the interest rate you’ll pay.

If you’ve recently walked away from a cellphone contract, it’s a good idea to get the company to put in writing that the contract has been fulfilled and is now closed. This can help prevent any damage to your credit rating. We are always pleased to help if you want more information on how to preserve or improve your credit rating.


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What is the difference between a Consumer Proposal & Bankruptcy?

There is much confusion today regarding the difference between a consumer proposal and a bankruptcy.

They both fall under the Bankruptcy and Insolvency Act and allow you to extinguish unsecured debts but there are some very important differences as illustrated below:

Consumer Proposal:

A consumer proposal is an offer you can make to your creditors to pay off the debt as an interest free payment over a period of up to 5 years. Very often your creditors will accept less than what you own depending on your financial circumstances. Usually you will need to offer more than what the creditors would have otherwise received had you filed for bankruptcy. When you file a consumer proposal with a trustee in bankruptcy your assets are fully protected from the creditors, interest stops on your unsecured debts and creditors calls stop.

Consumer proposals can eliminate the debts such as credit cards, personal loans & lines of credit, over drafts, Tax & HST, student loans more than 7 years old, medical service plan and mortgage shortfalls.

Bankruptcy:

When you file for bankruptcy your assets are not protected from the creditors and may be seized by a trustee in bankruptcy in order to pay off your debts.  Also, a portion of your income may be taken each month by the trustee in order to pay your creditors.

Unlike consumer proposal where the agreed monthly payments are fixed, in a bankruptcy your income is monitored and payments to your creditors are increased as your income increased. Also, if you win or inherit money during the bankruptcy period or receive a tax refund then the trustee will take this to pay your creditors. These monies would be protected in a consumer proposal.

In summary, a consumer proposal allows consumers to make an offer to their creditors to pay back what they owe through a fixed, interest free, monthly payment while protecting their assets.

Article courtesy from Peter Temple, Debt Consultant from 4 Pillars Consulting


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Financial Literacy presentation for adults & the entire family (ages 12 & up)!

You are invited to a complimentary presentation on Financial Literacy for adults & the entire family (ages 12 & up)!

November is Financial Literacy month!

You don’t have to look very far to read an article in the newspaper or watch a segment in the news talking about the lack of education when it comes to teaching youth and adults the basics about Financial Literacy.

We will be hosting an educational presentation on Financial Literacy for adults and the entire family (ages 12 and up)! While the topic of Financial Literacy can be dry, dull and boring this presentation was designed to be an incredibly powerful program that will both educate and entertain. This presentation will provide some good information about the understanding of money management and investing. The presentation is based on the EnRiched Academy  program that was endorsed by Jim Treliving and Bruce Croxon from the Dragon’s Den.

We will be covering the following topics:

  • Understanding how money works and where most North Americans are financially
  • Money myths and misconceptions
  • Why some people, including high earners, never get around to saving money & how to avoid the pitfall
  • How important is to create the habit of saving money as early in life as possible
  • The power of saving 10% of what you can earn and more
  • The magic behind compounding interest and how it works
  • How to systemize your savings and where to put your money for maximum wealth building
  • How credit cards, credit score and credit card interest work
  • What happens if you only make minimum payments or neglect to pay your credit card on time
  • 6 steps to having an A+ credit score
  • What “Good Debt” and “Bad Debt” are and what makes the difference
  • Your personal brand and how it can have an impact on your future

Dates: 

Saturday, November 2nd from 10 am to noon at Collingwood Neighbourhood House located at 5288 Joyce Street, Vancouver (room A multi-purpose room on the main level).

Saturday, November 16th from 10 am to noon at the Fleetwood Community Centre located at 15996 – 84th Avenue, Surrey (room 3).

For more details and to register, please:

Email: aaragon@dominionlending.ca or jaragon@dominionlending.ca

Call: 778.893.0525 or 604.931.9000

Reserve your spot today as space is limited.

You don’t want to miss this great event!