Zero Down & 40 year Amortization Mortgages to End on October 15, 2008

The Department of Finance today announced that it would change some of the rules for high-ratio mortgages, and that “these requirements will apply to all government-backed mortgage insurance policies (whether issued by CMHC or private insurers) for high-ratio mortgages on residential properties with up to four units.” These rules will come into effect on Oct 15, 2008. If you are in the market and would like to avail of a zero down mortgage or a 40 year amortization mortgage, you need to act quickly. For that matter, there may be added documentary requirements for borrowers applying under stated income programmes.

Here are some highlights of the changes:

1. Maximum amortization reduced to 35 years for new government-backed mortgages.

2. Minimum 5% down payment for new government-backed mortgages. Borrowers may borrow their 5% down payment, but it will not be insured under the new guarantee framework.

3. New credit score floor of 620 for new government-backed mortgages. There will also be limited exceptions to this rule, recognizing that there are some borrowers with credit scores below 620 that otherwise represent a low credit risk.

4. Minimum loan documentation standards “to ensure that there is evidence of reasonableness of property value and of the borrower’s sources and level of income.” The Department of Finance’s announcements today did not elaborate on this point.

5. No government guarantee for high-ratio mortgages where no amortization is required in the first few years. This includes high-ratio mortgages that begin with “interest-only” payments and HELOCs.

6. Maximum of 45% on borrowers’ TDS ratio for new government-backed mortgages.

Exceptions would be allowed after October 15th where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before October 15, 2008. Canadians who already hold mortgages will not be affected by these changes.

The Department of Finance stated that “today’s announcement marks a responsible and measured approach by the government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.” It also noted that mortgage arrears in Canada have remained low in recent years.

Here is the link to the Department of Finance announcement: http://news.gc.ca/web/view/en/index.jsp?articleid=409769&categoryid=16

Treatment of Rental Income for Investment Properties

Are you looking to purchase rental property? Purchasing a residential investment property is more complex compared to purchasing an owner-occupied property. This type of mortgage is also considered higher risk. Many lenders will not finance investment properties. Secondly, the treatment of rental income from the property will vary widely from lender to lender. Thirdly, owner-occupied rental income (such as a house with a basement suite, duplex, triplex and fourplex property) is treated differently from an investment property which is not partially owner-occupied.

Here are some of the ways, lenders treat the income from a rental property

• A percentage of rental income (usually 50%) is added to the borrower’s income
  • This is the more conservative approach to using rental income for qualification purposes. This is also the most common approach used by mainstream lenders. For example, if the property can rent for $1000 per month or $12,000 per year, lenders will add $6,000 (or 50% of $12,000) to the borrower’s income to qualify the mortgage. As it often happens with mortgages (especially those in the Metro Vancouver area) that the mortgage payments are higher than the rent income. With this method, qualifying for a mortgage to purchase a rental property will require a much higher income for the borrower.
• Rental Offsets (50% - 100%)
  • A more aggressive approach is using a rental offset. With this approach, the rental income is treated as a deduction from your mortgage payments. The percentage rental offset may vary from between 50% to 100%. This will depend on the lender’s policies, whether the mortgage is an insured mortgage, whether this property is owner-occupied and of course, your overall credit.
  • Here’s an example using an 80% rental offset. Say, for example, that a property’s carrying costs (consisting of principal, interest, property taxes and heat) is $1,100 per month and the property can rent for $1,000 per month. In this scenario, the lender will use 80% of the rental income of $1,000 or $800 and deduct this from the carrying costs of $1,100. This results in a negative cash flow to you of $300 per month. If you can afford to make this extra payment, you can easily qualify for this purchase.

Forecasts from the Big 5 Banks Continue to Point to Easing of Interest Rates

The Bank of Canada cut its overnight rates on April 22 to 3%. As a consequence, lenders/banks brought down their prime rate to 4.75%. The question in everyone’s mind is - Have we hit the bottom?

Here’s what economists at the Big 5 Banks are forecasting:

1. TD Canada Trust - “more easing to come” (see TD Economics Weekly Bottom Line dated April 25, 2008)
2. RBC - Overnight rate to drop to 2.75% (see RBC’s Financial Markets Monthly for April 2008)
3. CIBC Wood Gundy - 0.25% rate cut to 2.75% (see CIBC World Markets Market Call for April 24, 2008)
4. BMO - Rates to 2.75% by September 2008 (see BMO’s Rates Scenario dated April 1, 2008)
5. Scotia Capital - Rates to 2.75% by 2nd Quarter 2008 (see Scotia Bank’s Forecast Update dated March 28, 2008)

With rates expected to decline significantly in the short term, you need to sit down with your mortgage broker to design the right strategy to take advantage of lower rates. One option is to switch to a variable rate mortgage. If you are currently locked-in on a fixed rate mortgage, it may be worthwhile to switch and absorb the prepayment penalty (if any). Your mortgage broker should be able to advise you on how to properly time your transaction so you obtain the maximum benefit.

CMHC’s Vancouver Housing Market Update

On April 10, 2008, Robyn Adamache, CMHC’s Senior Market Analyst, presented to a group of bankers and mortgage brokers in the Richmond and Vancouver area CMHC’s Housing Market Update. She discussed recent housing trends and provided an update on the local resale market

One notable trend is the greater acceptability of apartment living. This can be attributed affordability, land constraints, demographics, social, environmental and aesthetic issues.

Approximately 8% of Vancouverites are looking to buy a home. Thirty-five percent will be first time home buyers while 64% will be repeat buyers.

Despite a recent increase in listings to 5 months, the resale market is still in “sellers market” territory. Housing prices will continue on the uptrend. CMHC forecasts housing price increases of 8% for both Richmond and Vancouver. House prices in Surrey/White Rock will grow by 6%. In Delta, the price increase is expected to be 5%. . Overall, for 2008, house prices in Metro Vancouver are expected to increase by 8% in 2008 and 5% in 2009.  Although there was a dip in sales for the First Quarter of 2008, first quarter results are not a good predictor of sales for the full year

You may download Ms. Adamache’s presentation by clicking on this link.

How to Qualify for the Largest Mortgage Amount

With the high cost of property in the Metro Vancouver area, how does one qualify for the largest possible mortgage amount? Here are a few tips:

1. Have a good credit score - Having good credit has its privileges. Mortgage insurer guidelines now allow borrowers to spend up to 44% of their gross income on debt payments (including the mortgage on your new home). Not all lenders are implementing this guideline so you do need to shop around to find a lender that will finance you to this limit.
2. Take an extended amortization - An couple with a combined income of $60,000 can increase their mortgage qualification from $330K to $400K by increasing their amortization from 25 years to 40 years.
3. Minimize your other debt payment - Any payments you make to other creditors (auto loan payments, credit card payments, etc.) will reduce the amount you are allowed to borrow. You have two options: (a) You can fully pay these debts; or (b) apply to reduce the payments (possibly by getting a consolidation loan from your bank).
4. Consider purchasing a property with a rental suite - A portion of the rental income can be treated as a reduction to your mortgage payments resulting in a significant boost to the amount you qualify for.
5. Use a mortgage broker - Credit policies differ among lenders. Consequently, the amount you will get pre-approved for will depend on the lender you go to. This is why you need a mortgage broker. We know which lenders are providing the most favorable terms so you can get the mortgage amount that is right for you.

With these new guidelines, many of the first time home buyers that come through our doors are pleasantly surprised by the amount they qualify for. In many cases, they have been to their bank and they have been told that they qualify for much less. Of course, we don’t suggest that you buy a property that will stretch you financially. We believe that our job is to let you know how much you will be approved for. It is your decision as to whether you think you should go to the limit.

Variable Rate Mortgage Holders Usually Come Out Ahead of Fixed Rate Mortgage Holders

Based on research done by Moshe Milevsky, associated professor of finance at the Schulich School of Business at York University, holders of variable rate mortgages came out ahead of fixed rate holders 90.1% of the time. The study was based on mortgages granted between 1965 and 2007. The resulting savings from the variable rate mortgages allowed borrowers to pay off their mortgage between 8 and 19 months sooner.

While it may be true that the odds favor variable rate holders, 70% of Canadian still opt for a fixed rate mortgage. To many, there is nothing like the certainty of knowing exactly how much you need to pay each month.

To learn more, click here to read the April 2, 2008 article of the Vancouver Sun.

Where are house prices in Vancouver / BC headed in 2008?

You may find this hard to believe but I’m hearing that we can still expect house prices to increase in 2008. I was at the Mortgage Broker’s Association of BC Trade show this week and attended the presentation of two well respected economists - Cameron Muir of the BC Real Estate Association and Benjamin Tal of CIBC World Markets. Mr. Muir expects house prices to continue rising, albeit at a slower growth rate of between 7-8%, not the 20% growth rate we are accustomed to seeing during the past few years.

Unlike our friends in Ontario and Quebec, British Columbia is less impacted by the slow down in the US economy. For us, the biggest impact will be in the softwood lumber industry, which is reeling from the high Canadian dollar and from lower US housing starts. Thankfully, the forest industry now accounts for only 3% of our economy. Commodity and energy prices are at its peak and the pulp and paper industry is holding its own. With Central Canada being hit hard by the US slowdown, the Bank of Canada will be forced to drop interest rates. This will have a positive impact on BC’s housing market.

The key driver to the housing market is employment. With the unemployment rate the lowest it’s every been at 4%, it’s no wonder that our housing market will continue to remain robust. Wages have also been rising faster than inflation. The correlation between employment and housing makes a lot of sense. As people become confident of the job situation, they will want to own their own home (or upgrade to a larger home if their income increases).

What I take away from this is that if you don’t own your own home, you should seriously consider getting into the market as soon as it is feasible. Don’t bet against the experts. Even if you’re thinking that there will be a bubble (and I don’t know of any Canadian economist predicting a bubble), I suggest you hedge your bets a bit. Buy your own home. Since you’ll be there a while, you’ll be able to ride out any possible downturn while you enjoy the benefits of owning your own home.

What are the closing costs when purchasing a home?

Most lenders will ask you to show proof that you have the funds for closing costs. As you can imagine, the last thing a lender (and mortgage broker) would like to happen is that you go to your lawyers to close and don’t have enough money. Lenders require proof that you have at least 1.5% of the purchase price to cover closing costs. This is just a rule of thumb. At the time of approving your mortgage, lenders will not know exactly how much the final costs will be since these are calculated by your solicitor.

The largest closing costs is BC’s Property Purchase Tax (PPT). This tax is equivalent to 1% of the first $200,000 and 2% of the amount over $200,000. If you’re purchasing a property for $350,000, the PPT would be $5,000. If you are a first time home buyer, you could be exempt from this requirement.

Other costs include:

1. Legal fees - $650 - $800 typically
2. Fixed disbursements - $100 - $250
3. Form F ($15-25)
4. Insurance Binder ($25 - 35)
5. Tax Certificate from City Hall ($20-50)
6. Move In Fees ($50 - 250)
7. Adjustments for Tax payments and Strata fees - Pro-rated amount depending on when your transaction closes.

Goods & Services Tax (GST) - If you are purchasing newly built property, you will have to pay GST. Although you can pay this separately, most people add the GST to the mortgage amount. For lower cost properties, you can get a rebate on GST.

To learn more about closing costs, click on Bell Alliance’s Buyer’s Guide.

Should you have your home inspected?

A home is arguably life’s largest and most important purchase. If you are looking for a home, consider getting a pre-purchase inspection of the property you intend to buy.

A home inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components (roofs, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls, etc.) and systems (electrical, heating, plumbing, drainage, exterior weather proofing, etc.). The results of the inspection should be provided to the purchaser in written form, in detail, generally within 24 hours of the inspection.

A pre-purchase home inspection can add peace of mind and make a difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A home inspection helps remove a number of unknowns and increases the likelihood of a successful purchase

You should be aware that in British Columbia there is no licensing in place for home inspectors. In actuality, anyone can open up a home inspection business without any prior training or experience. In looking for a home inspector, you need can start by visiting the two major home inspection associations in BC - www.bcipi.net and www.cahpi.bc.ca. Be sure to ask your inspector whether you will be getting a written report; whether you will be allowed to attend the inspection; whether they have Errors and Omissions (E&O) Insurance; and how long they intend to be at the property.

Lastly, be wary if your inspector was referred to you by your realtor. Your realtor should offer you a choice of 3-4 home inspectors to choose from so as to avoid any conflict of interest.

Experian study shows that 30% of US Consumers improved their credit score in 6 months

In a study of US consumers from January to June 2007, it was found that 30% of US consumers were able to increase their credit score by 50 points over a 6 month period. This shows that it is possible to bring up your score significantly over a short period of time by making wise credit choices.

Credit scores can influence your ability to obtain a mortgage at favorable terms since it is a measure of your credit risk. Your credit score will determine what interest rate you pay on your mortgage, how much you need as a down payment and the repayment terms of your mortgage. Individuals with a very low credit score may not even qualify for a mortgage.

The study also found that:

• 41 percent of the U.S. population showed no change in their credit score from January to June 2007
• 2 percent of the U.S. population had their credit score improve by 51 to 100points from January to June 2007, whereas 3 percent of U.S. consumers saw their score drop 51 to 100 points during the same time period
• Nationwide, 23 percent of consumers had their credit score drop up to 50 points from January to June 2007
  

Click here to read the complete article.

If you’re looking to purchase a home within the next few months, you must make sure that you have the best credit score possible. I offer free one-on-one consultation on how you can increase your score. Raising your score takes time so start now!