24 Jul

What may be coming


Posted by: Aneta Zimnicki

Here are some of my thoughts on what may be coming, within the context of the changing economic landscape. Of course, we really don’t know for sure what will happen, but let’s look at what we can take into consideration to be better prepared.

Have we seen the true effect yet of loss of income? CERB benefits are on the cusp of running out for many folks (there is extension, but stricter, so some folks will not qualify). The majority of lenders already did not consider CERB personal income to qualify, however, this may be bigger effect on rental property financing. Specifically, lenders may not be necessarily comfortable with signed active leases. How do we know rents will roll in post CERB and higher unemployment? (This is a major question already being asked by commercial lenders). It is prudent to prepare for additional request for documentation, such as historical proof of rental deposits. Keep your deposits consistent and easy to verify against lease rent amounts for your portfolio rental property. For subject rental property, lenders may choose to apply a more conservative rental income than before.

Many Canadians opted for deferring their mortgage payments. Similarly, many also chose to defer property taxes. Technically, the date for re-activation and ‘paying back’ what was on hold is approaching soon. Some borrowers may have difficulty doing this, we will have to wait and see how the lenders and insurers will respond. I don’t think the collective intention is to force borrowers into default. The lenders are not in the business of holding large amounts of real estate. So, there may be tailored repayment solutions offered to keep the market stable. Historically, Canadian’s mortgage default rate is very low. Some models show even with high unemployment rate, default rate would still be low (source, Canada Banker’s Association).

Additionally, as deferrals have now had a few months to be ingested into the system, we may see some effects on mortgage renewals, refinances and applications. Although it was promised taking on a deferral was not going to affect your credit history, I have heard some cases (rare at this point in time, but still unsettling to hear), where the lender does take it into consideration the fact that a deferral request was made. It leads to more questions on income stability, even if you are now back to paying the mortgage.

We may see more horror stories about high mortgage penalties. Some borrowers inevitably will be forced to exit their mortgage due to economic consequences (like need to sell property or refinance). I previously discussed that not all lenders calculate their penalties the same way. Retail banks, for example, are notorious for bloating up their calculations. Without getting too geeky math on you, basically, because the current ‘posted’ rates are now most likely lower than when the borrower closed on the mortgage they now need to exit, means mathematically the ‘loss spread’ is higher, in particular for lenders that use a ‘discount off posted rate’ factor in their calculation.

This is why using a mortgage broker is so important when evaluating your mortgage options. There are lenders that are more ‘penalty friendly’, and at a minimum, upon a comprehensive mortgage review, if a retail lender is deemed to be the best mortgage solution for you, the penalty risk can properly explained and evaluated, and an appropriate term length and product can be selected. I am certain, that any news article you will see about a mortgage penalty horror, will paint the borrower saying ‘I didn’t know, nobody told me at the bank’.

Lenders may continue to rein in on refinances. CMHC, for example, continues to express sentiment on declining property values and increasing borrower debt. Within the commercial lending world, CMHC dropped a bombshell earlier this summer, putting significant restrictions on refinancing (CMHC insured) multi-unit property (5+ units). Lenders may reflect that general sentiment back by tightening up refinances. For example, loan to value or equity take out amount may be scaled back. I suggest that if you are considering a refinance, start the conversation now, so you can evaluate your position within this new context.

5 Jun

CMHC tightens lending criteria


Posted by: Aneta Zimnicki

Boom. CMHC makes more announcements.  Here are the technical details, followed by what this all means and my commentary, how this may affect the market.

Effective July 1, CMHC insured mortgages:

  • The maximum gross debt service (GDS) ratio drops from 39 to 35
  • The maximum total debt service (TDS) ratio drops from 44 to 42
  • The minimum credit score rises from 600 to 680 for at least one borrower
  • Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes

Additional clarification:

  • Essentially affects owner occupied purchases, less than 20% down payment
  • The debt ratios translate to purchase power decrease by up to 11%
  • Non-traditional sources of down payment included unsecured personal loans or unsecured lines of credit. Still ok is savings, the sale of a property, or a non-repayable financial gift from a relative
  • Official reason: “These actions will protect home buyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

My commentary:

  • July 1 deadline will create temporary frenzy with buyers.
  • This change grossly affects first time home buyers. 61% of these buyers buy with less than 20% down, which means they have to go through mortgage insurance.
  • Inevitably, this will shut out some buyers completely out of home ownership.
  • This means more renters.  There is already a rental housing shortage.  Rents will not become more affordable as a result, contrary to the ‘affordable housing’ government mandate. Additionally the government has not made it any easier for landlords and rental property financing, aggravating the situation. Minimal incentive to add to rental housing stock.
  • There may be more competition for lower priced homes outside of higher priced cities, to match with the new debt ratios.
  • Last month CMHC floated the idea of minimum 10% down payment.  Today’s announcement is another way to slice the same cake.
  • It’s like increasing the current stress test rate by about 1.3%.
  • The other two private insurers, Genworth and Canada Guaranty are not directly affected. Early indications seem to suggest they will not follow, but this still is being evaluated, no additional information at this time. Perhaps there will be some healthy market competition.
  • Is the ‘non-traditional source of down payment’ a reasonable concern? Based on a Feb 2020 survey, only 2% of down payments for CMHC insured borrowers with loan-to-values above 90% were from ‘non-traditional sources’.
  • CMHC standing firm on their controversial estimate last month of 12 month house price decrease of 9 to 18%….It’s like they want this to happen based on their policies, and make right with this statistic.

For real estate investors, another game changer:

CMHC suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing. “Consultations have begun on the repositioning of our multi-unit mortgage insurance products.”  So, not much more details given at this time, as you can see, but major game changer.

3 Jun

CMHC being controversial


Posted by: Aneta Zimnicki

Recently CMHC (Canada Mortgage and Housing Corporation) dropped a few bombshells during a parliamentary speech  The headlines implied: ‘Minimum down payment of 10%’, ‘18% drop in housing prices’, ‘One-fifth of mortgages to be in arrears’. Let’s peel this onion of misleading headlines.

Firstly, remember that CMHC is a government entity and one of its goals is to minimize risk and exposure to tax payers. So in that context, it has to make prudent decisions. In my personal opinion, even if policies are not implemented, ‘talking the market down’ can have a similar effect. However, I do not agree how this recent information was presented, it was very poorly communicated, grossly misunderstood and lacked industry consultation. It causes unnecessary loss in consumer confidence.

They provided rationale behind a possible 10% down payment as the new minimum, including how ‘minimum down payment mortgages’ are more likely to default. Note, this is just a proposal, we don’t know if and when this would be implemented. Of course, one of the major concerns is the new blow to first time home buyers, who now may never get their foot in the door. Purchases over $500K already have a (sliding scale) 10% down payment requirement, so the biggest change would be to the ‘more affordable’ housing price range.

The 18% drop in housing prices is a sound bite. The 18% is actually the higher end of the 9% to 18% range they provided in their estimated average national housing price drop in the coming 12 months. But there is no such thing as a national housing market. It is very much location specific. So implementing broad brush policies based on those statistics is not effective. Some regions have seen significant increase in prices over the last year or so, so even this possible drastic drop would put them where they were a year or so ago, hardly what you would call ‘the bottom dropping out’. Indeed, some regions, particularly where job loss is high, will see some higher declines, and perhaps this is where a scalpel needs to be applied to the policies to reduce the risk. We don’t have a crystal ball, but at the moment, the industry consensus is that the CHMC prediction is over-estimated.

Interestingly, the government was so overly confident about house values, that they rolled out the First Time Home Buyers Incentive ‘shared equity mortgage’ just last year to help entry level buyers. Understandably, COVID-19 could not be predicted, but the span of the government’s confidence in the housing market from then and now is broad and the message causes confusion.

Lastly, the math lesson. What the written announcement said: ‘We estimate that 12 per cent of mortgage holders have elected to defer payments so far, and that figure could reach nearly 20 per cent by September.’ What the people heard ‘20% arrears = foreclosure city, 1 in 5!!!’ CMHC had to later clarify via twitter: “12% of mortgages are in deferral; that could be 20% by Sept. Deferred mortgages are not in arrears since they are deferred with lender…That 20% is *at risk* of being in arrears 90 days after a required payment is missed.”

Further to that, the latest statistics on mortgage arrears (Jan 2020) is 0.24% of all mortgages are in actual arrears 90+ days. Historically, Canada has not gone over 0.5% delinquency rate, even during the last financial crisis. Even when you chart the closely correlated unemployment rate with mortgage arrears, the projection is still hovering under 1%. (Source: Canada Banker’s Association).

Additional confirmation of this is the Bank of Canada currently expects the arrears rate to peak at 0.80% by the third quarter of 2021.

When you see headlines like ‘mortgage deliquencies expected to rise 200%’ (as in the recently published Transunion report), remember the math: 200% increase on 0.24% is 0.72%. Remarkable how low that is.

I am not saying we have a rosy financial picture right this moment, but this context certainly put things in better perspective.

It will not surprise me if CMHC continues to evaluate their underwriting policies (translation: tighter rules). They continue to hint at being able to ‘cover losses’ if there are claims. Another very fresh bombshell is their recent announcement about multi-unit commercial property refinancing. There is minimal guidance provided on this one so far, allow some more time for details. In general, the idea is they do not want to have equity take outs that are not re-invested back into housing.

There are two other private mortgage insurers in the marketplace. Whether they implement or mirror any changes CMHC does is unknown at this time. But perhaps there will be some healthy competition. We will have to wait and see.

27 Mar

Mortgage lending: business is open, update on process


Posted by: Aneta Zimnicki

Here are some updates at this time on the mortgage lending process.

Banks and lenders have not shut down.   Much of the industry was already operating remotely, or had the capacity to do so.  They are just a little busier, understandably so.  So, if you need mortgage financing, don’t get discouraged, just allow some additional time for lender response.  Regardless of the situation, my approach to all  applications I submit to lenders is to package it up in a way that is easy for the underwriter.  A borrower and mortgage broker can sort out a lot of things upfront prior to submission to that effect.

A few modifications to the financing process have been implemented recently.

Physical appraisals  (termed ‘full appraisal’) are now modified. This avoids appraisers having to step into the property.  It uses a combination of technology including live virtual video tours, photos supplied by occupant, telephone interviews and even assessment of the interior through windows (yes, legit, with consent).  Some applications, particularly rental property, do require ‘full’ appraisals, and cannot be waived, hence these solutions.  Lenders have already had policies in place for other less physical appraisals which may suffice for the rest of the applications. This includes drive-by, desktop appraisals or reliance on an auto-valuation system.

Lawyer closings, where signature and identification verification needed to be done in person, have been modified to using technology like videoconferencing.

Many branches are closed or scaled down open hours for walk ins.  Financing via a mortgage broker almost always requires no need to visit a branch, and at this point, lenders are modifying this requirement.  For mortgage deferral requests, lenders have set up phone and online, to avoid contact.

22 Jan

How is it possible to get approved for multiple mortgages?


Posted by: Aneta Zimnicki

I remember a while back, I told someone I met that I own multiple real estate property.  They were shocked and said ‘You own more than your own house? You have more that one mortgage?’ They couldn’t understand how one can acquire so many assets and loans, without being super rich to begin with.  The truth is, owning multiple properties and mortgages really isn’t in the vocabulary of the general public, because  they have a generalized fear of debt and a lack of understanding how mortgages can work for you.  Time to bust this myth!

How you can get approved for multiple residential mortgages is essentially how you would get approved for your first mortgage. Lenders look at your income, credit, existing debt and calculate in the new mortgage debt.  If you can carry the debt within a certain ratio of your income, as per the lender’s policies, you can get approved for the mortgage.  Of course, there are nuances in the lender’s policies, and also the subject property has to conform within those policies.

So as long as your income increases somewhat proportionally to the subsequent mortgages you get for your investment properties, you can stretch out for many properties.  And remember, that doesn’t mean you have to continually get massive raises at your job to boost that income, it is the rental income that can assist as well.  But note, ideally properties should cashflow more than just beyond breaking even (basic expenses: mortgage payments, taxes, condo fees, heat), otherwise your ‘job income’ has to absorb the loss and that calculation has to be within the debt ratios.  The lenders also factor in other expenses (because there are, amateur investor mistake to think there are not! Maintenance, vacancy, insurance, property management are some examples.).  The lenders often do this by a generalized calculation (for example, a percentage of rent), rather than examining each of the actual expenses.  So the key is to cashflow positive after factoring all that in.  Then this boosts your income, or conversely, doesn’t burden your income (like negative cashflow would).  Assuming your application is for a cashflowing property, theoretically your debt ratios should remain the same.

Some key components to getting those mortgages approved are: have income that supports the prescribed debt ratios, have good credit, keep your non-mortgage debts (credit cards, line of credit, car payments etc) under control and reduce where possible,  get cashflowing property, have money for the downpayments, work with a mortgage broker that can structure your mortgages properly and is not transactionally-focussed but looks at the big picture and your future portfolio.

Eventually you may encounter some roadblocks with some lenders, but usually there  is then opportunity to work with other lenders. Again, that is why proper mortgage planning is important, along with your broker having intimate knowledge of the lenders’ policies.

It is very common for many investors to simply just run out of their own money before hitting a mortgage roadblock.  But that is a good problem to have, chances are you have created a nice portfolio with your own money, now you are entering second phase of your business, which is possibly working with other investor partners.

So it is very possible to get multiple mortgages.  There are many strategies associated with investment property mortgages, I discuss many of them in my blog and encourage investors to start the mortgage planning conversation early to position for better success.

4 Dec

What you need to know about down payment


Posted by: Aneta Zimnicki

There are many aspects to a mortgage application, each with its own nuances, details, and require planning. Don’t find yourself saying ‘I wish I’d known that’, when you have a home purchase on the line.  Let’s expand on what lenders are looking for with respect to down payment.

In general, lenders like to see 90 days bank statements showing you have the funds.  A progressive accumulation of funds is acceptable, for example, paycheques.  Any large deposits or transfers will need an explanation.  Essentially, the lender wants to ‘follow the money’, so if it came from your other bank accounts, you need to show that statement also, going back 90 days.

The simplest approach is to have your full down payment amount set aside before 90 days back, in a bank account with limited transactions.  If funds are not seeded for 90 days, it may fall into the other scenarios below, or, without proper explanation, it may become a deal breaker.

If your down payment is a gift, you need a signed gift letter, including a declaration that the gift is non-repayable.  The lender may also ask for proof of the funds.  This may involve bank statements from your giftor, which may become a delicate topic, so best to prep for this conversation.  Or, the lender may ask for proof of funds landing into your account.  Don’t set yourself up for a flagged file, avoid the gray area, a gift should really mean a gift.  In general, the gift only qualifies from immediate relative. For the majority of rental property applications, lenders do not accept gift down payment.

If funds are from overseas, prepare for more questions.  This is due to money laundering regulations.  Firstly, lenders have a list of sanctioned countries which can halt a file.  Even if not, lenders often like to see the funds seeded in a Canadian account for a certain amount of time, like up to the 90 days stated above.  Transferring funds internationally can take long, don’t put yourself in a time sensitive situation.

Lenders want the funds to be liquid.  They will expect, before closing, proof of liquid funds landing into your bank account.  This may involve, for example, selling stocks, or a firm sale agreement of another property, if using those sale proceeds.  If you qualify, bridge financing may be possible if the sale proceeds come after your subject purchase closing.

Down payment funds can be borrowed, but you have to qualify.  Most importantly, the debt payment has to be factored into the debt ratios.  In this situation, most preferred is a secured loan, like home equity line of credit (HELOC), secured on another property.  Most lenders will accept this as a down payment on a rental purchase.  However, an unsecured loan, like personal line of credit, is usually only reserved for owner occupied purchase, and as long as you qualify.  For all these loans, you need to have room in your borrowing limit, until the day of closing.  Typically, a recent statement is acceptable.

Borrowed funds may weaken the file if it is borderline in other aspects, such as credit, debt ratios or minimum 5% down payment (applies to insured owner occupied purchase).  The lender wants to see that you have the capacity to save funds, and won’t spiral into default at the first sign of an unexpected expense.   Similarly, for a borderline file, even if you don’t borrow funds, having no additional savings above the down payment may be taken into consideration.  This does not mean applicants with limited savings cannot get approved, applicants can demonstrate strength in other areas.

In addition to down payment, lenders request proof of funds for closing costs.  The rule of thumb is 1.5% of purchase price, regardless of actual closing costs.  This does not mean you don’t plan for actual costs, which can be higher. These funds do not need to be seeded the 90 days, and can be borrowed, even on credit card, for example.  If borrowed, however, the loan needs to be factored into the debt ratios.

Unless a qualified gift, it is implied the funds are from your own sources. For example, 90 days savings via your own bank statements or your most recent line of credit statement. A common real estate investor question is about funds from ‘joint venture partners’.  The simple answer is, if the funds come from the partner, then the partner has to go on the mortgage application and title.  This is why many real estate investors keep aside their own funds to close (like a line of credit with borrowing capacity).  This allows flexibility of not adding partner to mortgage application.  Note that whoever is on the purchase agreement must be on the mortgage.  Working with partners is a more detailed conversation you should be having with a mortgage broker, and ahead of a live purchase offer.

A second mortgage on the subject property,  at the time of purchase, can be considered  ‘borrowed funds’ for down payment. However, usually second mortgages are done once you own the property,  post close, or during a refinance. This route is more costly, and harder to qualify for, if doing it together with a first mortgage at time of purchase.  But, it may be the solution for getting you into the property. This scenario is typically shorter term and is coupled with a plan to pay off the second mortgage or restructure the entire combined mortgage.

In general, subject to qualification, minimum down payment for purchase of owner occupied property (or owner occupied with rental suite) is 5%, and, 20% for full rental. Theoretically, if you can qualify with ‘borrowed funds’, such as a secured line of credit, down payment can be zero %.

4 Sep

First-time home buyer incentive: My insights


Posted by: Aneta Zimnicki

The government finally released more details on the first-time home buyer incentive program (FTHBI). To get a good overview of the program, you can check out the consumer website

Here are some of my remarks after perusing the information and manuals. There are some details which may catch consumers off guard. And as often with new programs, we will get better idea once we see the lenders put this to practice.

Essentially this is a shared equity program. You are going into business with the government. “5% or 10% shared equity mortgage with the Government of Canada. A shared equity mortgage is where the government shares in the upside and downside of the property value.” If your property value goes down, you are still responsible for repaying the shared equity mortgage based on the current home value at time of repayment.

There are 2 calculations critical to eligibility, including a ‘mortgage to income’ calculation (it’s not exactly just 4 x income) and ‘maximum price’ calculation. Best to consult the online calculator. https://www.placetocallhome.ca/fthbi/eligibility-savings-calculator Program staff advise these calculations are hard stops.

Based on the calculator, if using max income of $120K, max purchase price is $564,700 (if 5% incentive for existing property, $84,700 down payment, yielding $28,235 incentive) or $533K price (if 10% incentive for new construction, $53K down payment, yielding $53,300 incentive).

Program staff state this is a Canada initiative, and acknowledge it is not one size fits all, so Toronto and Vancouver applicants may not see much use due to higher property prices. It wouldn’t be surprising if there is a frenzied interest in properties at the top price point of the incentive, $533K/$565K in certain higher priced markets, already adding to the competition of entry level homes.

For new construction you can choose incentive of 5% or 10%, nothing in between. Program staff advise 5% max incentive for new build triplex/fourplex. 5% incentive is for existing property.

Full rentals (duplex to fourplex) are not eligible, there must be at least one suite owner occupied. Note single unit rentals are already not eligible for mortgage insurance.

Minimum 5% downpayment from traditional sources including RSP homebuyer plan and gift are acceptable. Beyond the 5% min, it can be borrowed funds, as long as you can qualify with the debt ratios. Triplex/fourplex have min 10% downpayment.

You have to pay mortgage insurance (added to mortgage), and combined own downpayment plus incentive needs to be less than 20%. So min loan to value of 80.01%. Because it is insured, max amortization is 25 years. Theoretically, as advertised on their website, you have a ‘monthly savings’, but in the end, you still have to pay incentive back, most likely ‘with interest’ as calculated by the property appreciation.

Max $120K combined qualifying annual income, and at least one borrower must be a first-time homebuyer. It appears a way around this is dropping your spouse or co-applicant from application and title, in this way their income is not counted. But consult your lawyer on this one!

Income verification is subject to requirements set out by lenders and mortgage insurers. They advise that all income needs to be counted, including rental income (from subject property if there is rental suite, and unclear about portfolio rentals, safe to assume they count as well). In this case, borrowers may be challenged to show less income rather than maximizing income as in the typical mortgage application process. This incentive is not compatible with ‘business for self’ mortgage insurance program where it goes beyond the ‘verifiable’ income, shown on income taxes.

The incentive is registered as a second mortgage. It will be interesting how this plays out. Not all lenders are or will be participating, and some who have ‘collateral charge mortgage‘ may adjust their programs. Lender participation is discretionary and there is no lender list available. There may be additional legal costs because you are closing with 2 mortgages. And, although the incentive does not prevent you from changing lenders (as long as they accept the incentive program), a postponement/subordination agreement may be required. If you need a traditional ‘second mortgage’ (for example you can’t qualify for a typical refinance or need higher loan to value), this now get slipped to ‘third mortgage’ and the incentive may hinder you from getting this financing. The incentive always has to stay registered in second position.

Depending on original approved incentive (ie. 5% or 10%), repayment is required in full whether it is made at any point within or at the 25-year period or upon the sale of the property. Only one lump sum payment allowed. Appraisal absolutely necessary at time of repayment, as you can imagine, this will be one of the key documents, used to calculated the government’s ‘profit or loss’ on the incentive.

Refinancing does not necessarily trigger repayment of incentive, but the combination of charges can not exceed 80% LTV at time of refinance. A port however, does trigger repayment, as this qualifies as a sale of property.

It is recommended that you plan any renovations accordingly, as any value add means your repayment amount increases based on shared equity calculation (5% or 10% of property value). It may be worth your while to repay the incentive before major renovations or if you are anticipating significant property value increases.

Program states it is 3 year initiative, $1.25B over 3 years, first come first serve, the annual funds allotted beginning of each fiscal year. Earliest closing date is Nov 1, 2019 and latest closing date accepted Mar 31, 2024. Possible program phaseout with a new government?

Applications for existing property must be within 6 months closing, and new construction must close within 18 months of application. It appears they will not be overly forgiving with construction delays, perhaps a 1 to 2 month exception. Knowing how new construction is, this could be a potential issue with borrowers. You need to be clever with the timing when you submit to the incentive program.

A change in occupancy does not trigger repayment of the incentive. The manual states: “The first ranking lender is not permitted to knowingly allow a borrower to circumvent the eligibility criteria with respect to occupancy for the FTHBI Program. The Program Administrator does not need to be notified of a change in occupancy.”

10 Jul

Time to consider locking in your variable rate?


Posted by: Aneta Zimnicki

These are interesting times. Our economy may not be doing so well. In general, fixed mortgage rates move in tandem with the bond market while variable rates move with the lender’s prime rate, which is based on the Bank of Canada’s overnight rate, as per announcement noted above. The bond yields have been falling since late 2018. We are getting to a point where the net interest rate on your variable rate mortgage (usually expressed as prime minus x, with today’s prime being 3.95%) is converging with fixed rate.

If you current have a variable rate mortgage, consider calling your lender and see what their fixed rate offering is. There is no one right answer of whether your should do variable or fixed, but it’s worth getting the specific information from your lender as part of you decision making process.

A few things to note:

Understand that mortgage penalties for fixed rate mortgage are different than variable rate. This especially matters depending what type of lender it is. See related blog here  If you need the flexibility of breaking your mortgage (for example, not only if you sell property, but want to take opportunity to refinance), variable rate has the certainty of lower penalty cost.

Determine what your term length goals are. Depending on lender, you may have to choose a term length that is longer than your current term left, essentially extending your mortgage term. There is no point locking into a term length that is not reflective of your goal, as it may cost you in penalties, as noted above. You may want to check with lender about portability, but I highly recommend to never assume that that is a guarantee. The worse case scenario is breaking your mortgage with penalty.

Do you think variable rate will drop further? Maybe you want to continue to ride the wave down, and get savings in that way. This decision of course is up to you based on your assessment of the market and economy. Similarly, do you think fixed rates will go down even more? Maybe you want to wait and see.

Note that the mortgage product market has changed significantly over the years. There are now multiple mortgage product categories, with different rate offerings. See related blog here. This may or may not affect the fixed rate offering, when you request to lock in. So if you compare with friends and colleagues, keep this in mind, it may not be apples to apples. For example, rental versus owner-occupied, insured versus not insured (ie. mortgage insurance like CMHC). Sometimes insured mortgage rate is lower, so if your property was historically insured, lender may be able to work something out, but it may be up to you to point this out to lender’s attention.

It may be even possible that it is worth your while to break your variable rate mortgage and switch to another lender, if their fixed rate offering is better than your current lender. However, you would have to re-qualify with the new lender. This is a more detailed conversation to have with mortgage broker. At this point, if you are ‘ripping the bandaid’, you can consider extracting equity (refinancing ), or restructuring mortgage (possibly lowering monthly payments and improving your cashflow or adding line of credit).

6 Mar

Why advertised rates are baloney


Posted by: Aneta Zimnicki

A while back, mortgage rates were simpler. They could be summarized in one simple table. Then regulations changed. And they changed again, and again….Now you need to be a detective to figure out what applies to your specific situation. That is why advertised rates are baloney. Because they don’t tell you the whole story.

The biggest regulatory change is the mortgage insurers’ criteria. The key changes in insurer criteria are: purchases only, no refinances (huge impact to consumers and their debt load forcing them into more expensive debt), maximum 25 year amortization, maximum $1M purchase price, must qualify at the benchmark rate (currently 5.34%), no single unit rentals (only duplex to fourplex, a huge impact to investors).

In response to this, the financing industry spun out a beast of mortgage product and rate categories. Here is a rundown of how a typical lender classifies rates.

Insured: Means borrower pays the mortgage insurance. For the most part, it implies a ‘high ratio’ mortgage, where the down payment is less than 20%. In this case, the property has to be owner-occupied or if multiple units (duplex to fourplex), at least one unit must be owner-occupied. Other permitted properties are full rental duplex to fourplex (minimum 20% downpayment) and second homes (owner-occupied). It must meet the insurer criteria (noted above), and refinances are not eligible in this category.

Because the borrower is paying mortgage insurance, it helps mitigate the risk to lender, so they are able to offer the best rates compared to the other categories. In a perverse way, it can look like borrowers with a lower down payment are rewarded with a better rate. But not necessarily, you have to look deeper into the math.

This rate category is most likely the one being advertised, but this is very misleading because it excludes a large portion of consumers.

Insurable: Means the lender ‘bulk insures’ their portfolio, to help mitigate risk, but lender pays the mortgage insurance instead of the borrower. The application must meet the insurer criteria, as note above. Since the lender pays for the insurance, the rate is slightly higher than the ‘insured’ category. Here you may see further rate stratification based on ‘loan to value’ (LTV) range from less than 65%LTV to 80%LTV, or, credit score (but has to meet minimum insurer credit guidelines). Applicants are qualified at the greater of the contract rate plus 2% or the benchmark rate (the dreaded ‘stress test’).

Uninsurable: Means does not meet insurer criteria. In general, this is refinances, purchases over $1M, single unit rentals, amortization over 25 years. The overwhelming majority of lenders qualify at the greater of the contract rate plus 2% or the benchmark rate (again the huge impact of the ‘stress test’ is seen here). Many lenders will use 30 year amortization to qualify. In this category, the lender can choose to be more flexible with qualifying and varied with their product offerings, although some do not stray far from creativity and innovation.

One of the biggest segments in this category is refinance, and typically has its own rate, which is higher than the ‘insured’ or ‘insurable’ group. Beyond that, a rate premium model is applied, for an array of situations. A rate bump is added to the base uninsurable rate, or some lenders choose to add a lender fee to the file instead.

This isn’t necessarily a bad thing, because now a more common sense, case by case type of underwriting is used, and gets you to a yes versus a flat-out decline. Lenders price out the risk accordingly, and you are paying only for the specific added risk you present to the lender. Premiums can be applied for situations like rental property, second home, self employed, amortization above 25 years, debt ratios, credit issues, loan amount, size of rental portfolio, rental income calculations. The rate bump can be small, starting at 0.05%, but it depends on the situation. If the situation is more complex, then the application may fall into B lender territory, which has slightly higher rates (but not unreasonable, considering the risk and flexible underwriting approach).

Beyond that, there are other subset categories and industry terms thrown at you.

Non-B20 compliant: Generally means not subject to the ‘stress test’, so qualifying at contract rate without the +2%. This field is narrowed down to non-federally regulated lenders, essentially credit unions. The rate is higher, but it can be the difference between being able to qualify or not. The rate falls in between B lenders and the 3 categories noted above.

‘No frills’: Lenders use various names for this slightly lower rate product (like ‘low rate’, ‘basic’). It may be a modest rate decrease, but it comes with restrictions like stricter penalty costs, fees or exit limitations. Sometimes this is what you see advertised as a special, and unsuspecting borrowers sign up without fully understanding the restrictions. In my opinion, often not worth putting yourself in such a mortgage prison.

Quick close: Specials from time to time, typically for 30 or 45 day closing. This is for ‘new business’, so not applicable to applications already submitted, approved or waiting for closing. You have to understand that lenders’ costs increase the longer the time horizon due to market uncertainty, in return you get the certainty of an approval and rate hold.

Conventional or low ratio: Potentially redundant term used with categories mentioned above. Usually means more than 20% down payment.

Switch or transfer: Moving your mortgage from one lender to another, without any changes to structure, such as no new funds out, no change in amortization. However, you and the property still have to qualify. Rate depends on the situation, as now what used to be ‘insurable’ may possibly not be. A skilled mortgage broker ninja may be able to get you ‘grandfathered’ into a better rate category.

Equity take out: When you need to take funds out of your mortgage. Because you are restructuring the mortgage, this is considered a refinance.

In summary, rates are clear as mud, right? The plethora of regulatory changes means having a broker in your corner is more important than ever. Spare yourself the trouble and leave the rate and mortgage solution deciphering up to the pro.

5 Dec

What you need to know about self-employed income


Posted by: Aneta Zimnicki

Statistics Canada shows approximately 15% of the labour force is self-employed. This will continue to rise with our changing economy. Lenders are definitely paying attention and many are moving towards filling this niche. Recently CMHC (Canadian Mortgage and Housing Corporation) announced more support for the self-employed, but we still need more time to see how this will be implemented by lenders.

Self employment can come in various structures, like sole proprietorship, limited partnership, commissions, incorporated. Verification of self-employed income is a bit more complex than salaried or hourly income. In general, the easier it is to verify the income, the better the rate category. Each additional interpretation of income raises the risk for the lender, and is more work to review, hence the possible bump in rate.

General list of self-employed income verification, shown in order of complexity

1.  For sole proprietors and limited partnerships, using the lesser of the prior year or 2 year average of net self-employed income reported on taxes.

2.  Using the above, but applying ‘gross up‘ (typically 15%, but could vary) or an ‘add back‘ of eligible deductions.

3.  For corporation, reviewing past 2 years audited financial statements and using what is reported on your personal income taxes, for example dividends or T4 income. But it has to make sense, you can’t pay yourself more than you make. Or may use ‘add back’ of eligible deductions shown on the financial statements.

4.  Lenders like to see consistent or increasing income, any significant drop in most recent year may need an explanation. Not necessarily a deal breaker, but you need to tell your story.

5.  Supplementary documentation to show proof of business tenure, like articles of incorporation, business license, HST registration. Ideally, as noted above, minimum 2 to 3 years existence.

6.  The income verification may resort to reviewing typically 3, 6 or 12 months worth of business bank statements. This is done, for example, when there is a cash component to the business, you need to rely on your most recent income rather than a 2 year average, or you have been in business less than 2 years. This review is case by case, and a common sense approach is used. What income is accepted and what expenses are deducted is discretionary to the lender, but in general, it is a more forgiving approach.

7.  Lenders apply a ‘reasonability test’ on the income you submit with your application. They compare to what is typically expected from your industry.

8.  In lieu of submitting tax returns, a lender, in addition, can ask for a ‘self-declared income form’ to be signed. This also may include a declaration that you have filed taxes up to date and do not owe any income taxes or taxes greater than a specified amount (like $2000, but this varies).

No income verification means lenders are relying on the property equity alone. This is private lending territory.


Mortgage planning tips for self-employed borrowers

Do your taxes, submit on time and pay your taxes.

Have at least a 2 year history, if you can.

Have good records: financial statements, bank statements, tax returns, business licenses, articles of incorporation.

Lenders like consistency and stability. Varying income, especially decreasing, needs an explanation.

Decide what is more important, tax benefits of self-employment or recording higher income on tax return for the purpose of fitting into a more conventional mortgage product. Remember also that mortgage rules are always changing.

Building up your documented income from new self-employment takes some years and planning, that is why a conversation with a mortgage broker should be started early in the process, so you know how to best execute you plan. Consultation with your accountant and lawyer should also be done at this time.