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How this Summer’s New Mortgage Rules Will Affect You

Three significant changes to the CMHC’s mortgage rules will affect qualifying interest rates, down payments and income verification. As seen in REW.ca

The mortgage industry has seen many changes on lending guidelines in the past five years that has made it tougher for prospective homebuyers to qualify. This summer, there are new mortgage rules heading our way.

The changes are intended to continue with the industry’s recent focus on risk management, as per the Office of the Superintendent of Financial Institutions (OSFI) B-21 guidelines. OSFI is an independent agency of the Government of Canada that has a mandate to contribute to the safety and soundness of the Canadian financial system. It is responsible for supervising and regulating federally registered banks, insurers, trusts and mortgage companies, in addition to private pension plans subject to federal oversight.

Now the CMHC (Canadian Mortgage and Housing Corporation) is implementing three policy changes in accordance to OSFI’s B-21 guidelines. These changes will make it harder to get low-ratio insured variable-rate mortgages, mortgages for the self-employed and 100 per cent financing.

The changes are as follows:

  • Qualifying interest rate: The qualifying intcubeerest rate for all mortgages with variable and fixed terms of less than five years will increase from June 30. It will then be either the five-year Benchmark Qualifying Rate from the Bank of Canada (currently at 4.64 per cent) or the contractual mortgage interest rate, whichever is the greater. For fixed-rate mortgages, where the term is five years or more, the qualifying interest rate is the contract interest rate.

CMHC is allowing some flexibility to implement this change, which is to be implemented as early as possible after June 30 and no later than December 31, 2015.

What does this mean for you? Even if you are getting a lower interest rate on a term less than five years, in order to get approved for that rate you still have to qualify at the Benchmark Qualifying Rate (that is, you would be able pay the mortgage if it was at the qualifying rate). Previously, conventional mortgages could qualify at the lender discounted rate.

  • photo_incentives_190Cash back for down payments:  In order to encourage borrowers to save for homeownership, lenders’ cash back programs (where the lender will give the borrower up to 5 per cent of the value of the property in cash after the mortgage has been funded) will no longer be considered an eligible source of down payment unless borrowers can come up with a 5 per cent down payment on their own. This change will become into effect on June 30.
    This means that borrowers will need to get their down payment from traditional sources, such as savings, RRSPs (tax-exempt for first-time home buyers), gifts from immediate family, proceeds from the sale of another property, and so on.
  • Verification of income: Lenders will now be required to obtain “thiincomerd party verification” of income from all borrowers. This means lenders will be more stringent on income and employment verification. All lenders will have to call the employer for verification of tenure, position and income. Many lenders have already started asking for this information for quite some time. Some lenders are asking for bank statements for the past three months showing the deposit of your pay cheque into your bank account if the payroll is not prepared and paid by a third-party company such as ADP or Ceridian. This change will be effective on June 30.

CMHC stopped insuring “stated income” financing for self-employed individuals. Genworth and Canada Guaranty are still offering this program. At this point, we don’t know if there will be any changes.

This means that borrowers are going to have to provide quite a bit more documentation in order to verify income.

Why are All These Changes Happening?

The reason why there hchange-on-the-horizonave been so many mortgage rule changes, and more are on the way, is to ensure that all lenders follow policy and guidelines to include income verification and ratio qualification set up by OSFI. Previously, some lenders have been issuing mortgages without properly obtaining the proof of income. Insurers will be required to do their own due diligence and not only rely on what the lenders are telling them.

In addition, with historic low interest rates, the Government of Canada wants to minimize the risk once interest rates start going up and prevent what happened in the US with mortgage crisis.

While these changes are under way, many lenders have already made these changes on their lending guidelines and policies since last year in order to minimize their exposure and reduce risk. While Genworth and Canada Guaranty haven’t announced changes on the third-party verification, because many lenders have, this will be the new norm in the industry.

The good news is that there are still some lenders out there that haven’t adjusted their policies and will not do so until required to do so on June 30. For this and many other reasons, it is beneficial to use a mortgage expert who works with multiple lenders to find the best mortgage for your unique situation. We would be pleased to assist you, we can be reached at 778.893.0525.

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Is the Rate the Most Important Factor in a Mortgage?

With ultra-low interest rates all over the news, it’s no wonder that’s what people focus on. But they shouldn’t. As seen in the REW.ca.

It is interesting that, time after time, when you ask someone “What is the most important thing about a mortgage?” they respond by saying “the rate”. This was exactly the answer we got at a networking event last week when we asked that question.

DiscountThe reason why people focus on “the rate” is because that is the only thing you hear on the news. Last week, it was all over the news that both BMO and TD announced that they have dropped their five-year rate. Then the talk around the watercooler is “What is the rate on your mortgage?” or “I just got 2.74 per cent for five years”. There are other lenders that mortgage experts work with that have being offering lower rates than that for weeks.

But it’s not about “the rate” – or it shouldn’t be. While the rate is an important component of a mortgage, it is not the main thing you should focus on. You should be focusing on what is the best mortgage for your individual needs that provides a great rate but most importantly the best terms and conditions.

By understanding mortgage terms and what they mean in dollars and cents, you can save the most money and choose the term that is best suited to your specific needs.

So What Should You Consider When Looking for a Mortgage?

  • Pre-payment penalties.

All closed mortgages have the pre-payment clause that says that is you pay off your mortgage before the end of the term, you would have to pay a penalty calculated based on the greater of the IRD (interest rate differential) or the three-month interest penalty. However, there are some lenders that they are offering lower rates and in addition to the above penalties they are also including a 2.5 per cent to 3 per cent penalty (depending on the lender), which ever one is greater. In addition, since there is no magic formula to determine the penalty, each bank has its own calculation formula. Most banks determine the rate you pay based on the posted rate minus the discount you receive. However, at the time to calculate the pre-payment penalty they use the posted rate.

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  • Pre-payment options.

The pre-payments without penalty clause is one of the conditions that can save you thousands of dollars over the life of your mortgage. This clause allows you to make payments on the principal of your loan, or increase the amount of your periodic payments (monthly, bi-monthly, etc.) without a penalty. Each lender has different programs for pre-payments, they usually vary from 10 per cent to 20 per cent. For example, you can pay any amount within the approved percentage of the original value of your mortgage, or increase your periodic payments once a year, without paying a penalty. Many people don’t take advantage of this clause because it is generally difficult to save the extra money to make additional lump sum payments, but they can certainly increase their payments up to 20 per cent. By doing this it will help you reduce your amortization period and pay more money toward principal than interest.

  • How your mortgage is registered – collateral or conventional mortgage.

o   With a conventional mortgage, the amount you are borrowing (property value minus down payment) is the amount that’s registered. But with a collateral mortgage, the amount that’s registered is 100-125 per cent of the property value, and the lender has both a promissory note and a lien registered against the property for the total registered amount. The advantage of a collateral mortgage is easy access to credit. Since the mortgage is already registered for a larger amount than you need to buy the house, you can access additional funds in the future without any extra steps or legal fees. However, there are also several downsides of collateral mortgages especially if you are putting less than 20 per cent down payment. The reason being is that with the current mortgage rules you are not able to refinance your mortgage unless you have more than 20 per cent of equity in your home. Therefore, unless your home dramatically increases in value in the next five years you will not be refinancing anytime soon.

o   Free transfers or switches to a new lender when your term is up aren’t usually available. Most other lenders don’t like the fine print and restrictions of collateral mortgages and won’t accept them unless they’re a refinance, which costs you legal, discharge fees and possible appraisal fees.

o    You could end up paying a higher interest rate at renewal. If your collateral mortgage makes it difficult to switch lenders at renewal, you don’t have the ability to shop around for the best rate. That could end up costing you up to 1 per cent more on your mortgage rate.

QAsignpost-wide386Therefore, before you sign on the dotted line, make sure that it is clearly explain to you what are the terms and conditions of the mortgage you are getting. If you are not comfortable with the answers you are getting or if they are not taking the time to explain the details of the mortgage take a step back.

That is why it is important that you work with someone that you trust, feel comfortable with and know that they are looking out for your best interest. Mortgage experts have access to multiple lenders – including banks, credit unions and other lenders that only work with brokers – which will ensure that we find the best mortgage for your individual needs. After all, we work for you and not for the banks.


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Do I Really Need Mortgage Pre-Approval Before House-Hunting? – conclusion

Mortgage pre-approvals are often recommended for would-be homebuyers – but there are exceptions to every rule. As seen in Rew.ca

Q: I’m beginning my search for a new home. Is it really necessary to get pre-approved for a mortgage first, especially with interest rates going down?

A: Last month we explained the difference between getting pre-qualified and pre-approved for a mortgage. We often recommend that buyers get pre-approved for a mortgage (not just pre-qualified) before they start house-hunting, to put them in the best possible position when that perfect home comes up. But of course, there are exceptions to every rule.

preapproved1Whether you get pre-approved or not, it’s very important to figure out how much you can afford to pay before you start looking. Most home buyers have a rough idea of how much they would feel comfortable paying every month on their mortgage. However, there is no quick and dirty way to translate that monthly payment into a specific maximum mortgage amount. Other factors have to be taken into consideration such as down payment amount, closing costs, mortgage default insurance, property taxes, strata fees (if applicable) and heating costs. And you might be qualified to borrow more or less than you think, depending on your income, debts and credit history.

As discussed last time, obtaining pre-approval on a mortgage can offer advantages, particularly in terms of locking in a great rate for up to 120 days. However, it isn’t always advantageous, depending on the situation.

For example, we recently had a client who had a considerable sum to put as a down payment on a new home. With the price range he was looking at, the loan to value (LTV) ratio would have been close to 50 per cent. As previously mentioned, the most important thing is what you are comfortable paying on a monthly basis, not what you qualify for. This client wanted to keep his payments only a little bit above what he had been paying in rent. He had a great job and income, so he would have been able to qualify for a lot more. He had no credit card debt, no loans or lines of credit but had an established credit history.

Therefore, in this case, we didn’t get him pre-approved, because we knew there would be no problem getting him a great mortgage when the right time came. But we did do an in-depth analysis of his financial situation so he would know what his mortgage payment would be on the price range he was looking at, and also the maximum amount he would qualify for so he would have a wider price range to work with if necessary.

In addition, as interest rates were going down, there was no need to lock in a rate from a lender. However, if we had noticed that interest rates would be moving up again during his house hunting, we would have obtained a pre-approval. As mortgage experts, we do a lot of work behind the scenes to ensure we have the best options for our clients and provide them with the best mortgage available.

It is also important to remember that getting pre-approved doesn’t mean that your mortgage has been fully approved. The final approval is given once you have an accepted offer, your application has been submitted to the lender, and the lender has received and approved all the outstanding financing conditions outlined in a commitment letter.

Purchasing a home can be an emotional and time-consuming process as you want to make sure you find the right home for your needs. Knowing what you qualify for is critical when you start working with your real estate agent, as it shows you are a well-qualified buyer who is serious about purchasing a home. In fact, some agents won’t even show properties to buyers who haven’t talked to a mortgage expert or bank.

Talk to a mortgage expert to find out how much you qualify for and get you started on the road to homeownership.


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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.