With 47 per cent of homeowners scheduled to renew their mortgages this year, 2018 is a year of change for lots of Canadians. Here are the top 8 things you can do to get the best renewal: 1. Pull out your mortgage renewal now, and start early. When you are proactive instead of reactive you Read More
Your credit score is a big factor when you apply for a mortgage. It can dictate how good your interest rate will be and the type of mortgage you qualify for. Mortgage Professionals are experienced helping clients with a wide range of credit scores so we can find you a mortgage product even if your Read More
Ask people this question and you will get a variety of answers. Most home owners will say 10% is what you should put down. However, if you speak with your grandparents, they are likely to suggest that 20% is what you need for a down payment. The truth is 5% is the minimum down payment Read More
The Canadian Mortgage and Housing Corporation (CMHC) is a corporation that most are semi-familiar with, but do not know what CMHC actually does. CMHC is Canada’s authority on housing. They contribute to the stability of the housing market and the financial system. They also provide support for Canadians in housing need and offer objective housing Read More
|Every year Canadian families are caught in unexpected bad circumstances only to find out that in most cases the banks and the credit unions are there to lend you money in the good times, not so much during the bad times.|
35% Down Payment… The New Conventional Mortgage?
If you’re looking to buy a home, one of the most difficult things can be putting together a down payment. So how much do you really need before you can get into the home of your dreams? Let’s take a look at some of the different options, with their various pros and cons.
0% Down – A Thing of the Past?
If you’ve been in the housing market before, you might remember when banks offered the “zero down payment” mortgage. Although very attractive for obvious reasons, you may remember something called the Great Recession of 2008. The downside to these mortgages was that too many unqualified buyers were opting into mortgages they could not afford. When these people defaulted en masse, it led, in part, to the collapse of the housing market. As a result, Canadian legislators moved to implement safety measures preventing such high-risk mortgages from being so freely available.
Now if you’re looking to buy a home through a federally-regulated lender, you need a minimum 5% down payment. On the other hand, most major credit unions do still offer zero down mortgages. Lower income families are the primary target of zero down mortgages. The benefits of this are obvious, requiring less money up front, but what are the downsides? The biggest drawback is the high interest rate. Most of these plans carry an interest rate up to 150% higher than mortgages with 20% or more down. This interest can add up very quickly, in addition to mandatory insurance required for any mortgage with below 20% down. Over time these costs can become daunting expenditures, reducing the attractiveness of these mortgages.
Mid-Range Down Payments – 20% Down
In the Canadian housing market, 20% down is a bit of a milestone. Default insurance will be required if you put together less than 20% for a down payment. This is a pricy addition your regular mortgage payments. However, if you have 20% or more, you will be exempt from this burden. Common wisdom dictates that, in the long run, you will save a substantial sum of money if you can put together at least 20% for a down payment, as it will reduce your monthly payments substantially.
If you fall somewhere between 0% and 20% in terms of your ability to put together a down payment, you might want to look into the climate of your housing market. For example, when moving into a very popular housing market, where prices are increasing at a fast pace, it could be more expensive to wait until you have a larger down payment, as the prices will increase at a rate which negates the benefits you’d receive by not having to pay insurance. In a mellower housing market, you may be better off saving up and avoiding the higher interest and insurance premiums of a lower down payment mortgage, since the cost of housing will not be likely to climb so quickly.
Whatever your specific situation, it helps to have professionals look into it with you and crunch the numbers to make sure that you’re making the best decision for you!
35% Down Payment – The Ideal Mortgage?
Further conventional wisdom dictates that if a 20% down payment is good, 35% must be even better. CMHC insurance is no longer required if you have a 20% down payment. But what if you can afford an even larger down payment? Simply put, the more money you’re able to commit up front to a home, the less expensive it will be in the long run. Not only will you have less to pay off, but you will qualify for even more appealing interest rates. With lower interest rates and no insurance to worry about, the overall cost of your home will be substantially lower and you will be finished paying off your home far more quickly than if you were to put down the minimum.
Of course, not everyone can afford to put down 20-35% on a home. It’s important to note that, although there are benefits, a princely down payment is not required to get into the housing market. If you are a first-time buyer or belong to the low-to-mid income class, there are options available for you as well.
What’s truly important is to take a frank, honest look at your finances, be clear about what you can and can’t afford and get professional assistance. Buying a home should be an exciting and rewarding experience, and it can be, provided you put in the necessary footwork! Steve Marshall at Dominion Lending in Kingston would be happy to help, give me a call at 613-561-5433.
New Mortgage Changes Decoded
New mortgage changes announced by the Office of the Superintendent of Financial Institutions will become effective January 1, 2018. Whether you are refinancing, purchasing or currently have a bundled mortgage, these changes could potentially impact you. The new Residential Mortgage Underwriting Practices and Procedures (Guidelines B-20) will be applied to all Federally Regulated Lenders. This currently does not apply to Provincially Regulated Lenders (Credit Unions). However, Credit Unions may decide to abide by and follow these guidelines when these mortgage changes are placed into effect.
The changes to the guidelines are focused on
• the minimum qualifying rate for uninsured new mortgages
• expectations around loan-to-value (LTV) frameworks and limits
• restrictions to transactions designed to work around those LTV limits.
What the above means in layman’s terms is the following:
STRESS TESTING WILL APPLY TO ALL NEW CONVENTIONAL MORTGAGES
The new guidelines will require that all conventional new mortgages (with a down payment higher than 20%) will undergo stress testing. Stress testing means that the borrower would have to qualify at the greater of the five-year benchmark rate published by the Bank of Canada (currently at 4.89%) or the contractual mortgage rate +2% (5 year fixed at 3.19% +2%=5.19% qualifying rate).
These changes effectively mean that an uninsured new mortgage is now qualified with stricter guidelines than an insured new mortgage with less than 20% down payment. What are the implications of this to those purchasing a home or refinancing their mortgage. Let’s look at what the effect will be for both scenarios:
PURCHASING A NEW HOME
When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:
Current Lending Guidelines
Qualifying at a rate of 3.34% with a 25-year amortization and the combined income of $85,000 annually, the couple would be able to purchase a home at $560,000
New lending Guidelines
Qualifying at a rate of 5.34% (contract new mortgage rate +2%) with a 25-year amortization and the combined annual income of $85,000 you would be able to purchase a home of $455,000.
OUTCOME: This gives a reduced borrowing amount of $105,000…Again a much lower amount and lessens the borrowing power significantly.
REFINANCING A MORTGAGE
A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV.
The maximum amount available is: $560,000 minus the existing mortgage gives you $145, 0000 available in the equity of the home, provided you qualify to borrow it.
Current Lending Requirements
Qualifying at a rate of 3.34 with a 25-year amortization, and a combined annual income of $85,000 you are able to borrow $560,000. If you reduce your existing mortgage of $415,000 this means you could qualify to access the full $145,000 available in the equity of your home.
New Lending Requirements
Qualifying at a rate of 5.34% (contract mortgage rate +2%) with a 25-year amortization, combined with the annual income of $85,000 and you would be able to borrow $455,000. If you reduce your existing mortgage of $415,000 this means that of the $145,000 available in the equity of your home you would only qualify to access $40,000 of it.
OUTCOME: That gives us a reduced borrowing power of $105,000. A significant decrease and one that greatly effects the refinancing of a mortgage.
CHANGES AND RESTRICTIONS TO LOAN TO VALUE FRAMEWORKS (NO MORTGAGE BUNDLING)
Mortgage Bundling is when primary mortgage providers team up with an alternative lender to provide a second loan. Doing this allowed for borrowers to circumvent LTV (loan to value) limits.
Under the new guidelines bundled new mortgages will no longer be allowed with federally regulated financial institutions. Bundled mortgages will still be an option, but they will be restricted to brokers finding private lenders to bundle behind the first mortgage with the alternate lender. With the broker now finding the private lender will come increased rates and lender fees.
As an example, we will compare the following:
A dual income family that makes a combined annual income of $85,000 wants to purchase a new home for $560,000. The lender is requiring a LTV of 80% (20% down payment of $112,000.00). The borrowers (our dual income family) only have 10% down payment of $56,000.. This means they will require alternate lending of 10% ($56,000) to meet the LTV of 20%.
Current Lending Guidelines
The alternate lender provides a second mortgage of $56,000 at approximately 4-6% and a lender fee of up to 1.25%.
New Lending Guidelines
A private lender must be used for the second mortgage of $56,000. This lender is going to charge fees up to 12% plus a lenders fee of up to 6%
OUTCOME: The interest rates and lender fees are significantly higher under the new guidelines, making it more expensive for this dual income family.
These changes are significant and they will have different implications for different people. In conclusion, whether you are refinancing, purchasing or currently have a bundled mortgage, these changes could potentially impact you. If you do have any questions, concerns or want to know more contact Steve Marshall @ 613-561-5433. I can advise you on the best course of action for your unique situation. I’d be happy to help guide you through this next round of new mortgage changes.