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.

First National’s Excalibur programme - The Latest Casualty in the Sub-Prime Crisis

On May 15, First National announced that they will no longer be offering their Excalibur programme. Excalibur was an excellent programme targetted to individuals with challenges proving their income. Applicants under this programme would include self-employed individuals and individuals earning partial commissions or earning tips. Many lenders offer self-employed programmes insured by CMHC, Genworth or AIG. Unfortunately, many borrowers cannot fit under these guidelines. For example, if an applicant earned less than 100% commissions, they would not qualify for an insured mortgage. Secondly, individuals who had a significant income from tips could not self-declare this income.

During the past year, the players in the alternative lending market have dwindled. The remaining ones include Wells Fargo, GE Money, Citifinancial, Abode Mortgage and possibly a few others. These leave me to wonder how long the remaining players will stay in this market. With less competition, I expect that these lenders will want to charge a higher rate and possibly be more difficult to deal with.

The lesson to be learned is that these alternative lending programmes can be taken off the market anytime. If you feel you are ready to purchase, you should get yourself evaluated now before the market landscape changes (as it always does).

Mortgage Solutions for Seniors: Reverse Mortgage vs. HELOC

What are the financing options for seniors?  It depends on the situation.   For those who still have income (pension income included), it may be possible to obtain a home equity line of credit (HELOC), irregardless of age.  With a HELOC, you can draw on the mortgage until you reach the limit approved by the financial institution.   If you are using this strategy to fund your living expenses, your final objective must be to sell and downsize within a few years.  Eventually, you will hit the limit of your HELOC and you will have no more funds to draw on for living expenses.  At this time, you will need to sell your home if you cannot afford to pay the interest on the HELOC.

If you don’t plan (or want) to sell and/or your income is not sufficient to qualify for a mortgage, you need to consider a reverse mortgage.   With a reverse mortgage, it is possible to obtain up to 50% of the value of the property.  The loan does not have to be repaid unless you sell the home.  The amount that is loaned does not depend on your income or credit rating.  It depends on the your age,  the type of property (e.g., single detached, townhouse, condo) and location of the home.  Of the three criteria, your age is the probably the most important factor.  For example, a person who is 60 years old can expect to be approved for a maximum of 15% of the home value while someone in their seventies may get 30% of the value of the home.

You should consider a reverse mortgage if:

1. You plan to stay in that home for a long time
2. You cannot qualify for a tradtional mortgage or HELOC
3. You don’t want to repay the debt

The downside to a reverse mortgage is the interest rate.  The interest rate starts at 8%.   You may also expect to pay a set up fee of approx. $2000 (legal and appraisal fees).  While the interest rate may be on the high side, you may be able to offset some of the costs by investing the proceeds of the mortgage and generating some tax deductible interest expenses.  A good financial planner can explain this strategy to you.

Lastly, you should also explore the option of downsizing.  Be aware that there are significant costs to downsizing such as realtor fees, transfer tax, moving costs to consider.

Firstline’s Double Presidential Mortgage

Studies have shown that US interest rates tend to come down during a presidential election. Canadian interest rates tend to follow the same pattern.

Because of this, Firstline, a subsidiary of CIBC,  developed a product that matures on Nov 1, 2012. This will allow borrowers the possibility of renewing their mortgage when rates are at their lowest - two US presidential elections from now. Firstline’s interest rate on this product is very competitive at 6.00%.

CMHC’s latest product - Purchase an investment property with as little as zero down

CMHC just announced changes to their small rental programme (1-4 rentals).  CMHC will insure rental property mortgages with zero down.  The programme is available for

purchase or refinance transactions. Since this programme is so new, lenders still have to announce their participation in the programme.   I am certain that within a few

weeks, there will be a few lenders that will start taking applications.

Some of the requirements of the programme include:

1) Good credit -  To qualify for zero down, applicants need a credit score of at least 680

2) Proven income - Standard income qualification rules apply.  Applicant’s Total Gross Debt Service (TDS) ratio should be less than 42%

Please watch out for further announcements on this product on our website, BCmortgage.ca .  Feel free to phone or email me if you have any questions.

Umbrella Mortgages

Umbrella mortgages allow home owners to access the equity in their home for all borrowing requirements.  Lenders that offer this product will generally allow the home owner to borrow up to 75% (sometimes up to  90% with GE Mortgage insurance) of the value of the home.  If you have multiple borrowing needs, you’ll save money by using an umbrella mortgage.

Say for example,  your home is worth $400,000.  You also have a mortgage of $100,000, a auto loan for $20,000, personal loan of $30,000 and a boat loan of $40,000. All these loans can be rolled into one umbrella mortgage of $300,000 (75% of $400,000).  The benefit is lower interest rates and lower payments.   Please call for details.

Deferred closing costs

The process of buying a home is exciting but it can also be an overwhelming experience. Unexpected expenses often pop up such as moving costs, improvements on the home and furniture purchases. When looking at your financial picture, consider options that offer you flexibility at a time when you may need it most - Choose First Canadian Title’s Deferred Closing Cost Programme, offered exclusively through Invis.

With our programme, you can defer a number of closing costs, including: (1) Land transfer taxes; (2) Legal fees; (3) Title insurance premiums; (4) Registration or levies, if applicable; (5) Disbursements; (5) Applicable taxes

You pay no interest or principal for 6 months - There is a $199 administrative fee for amounts up to $3000 and $249 from $3001 to $10K.

Purchase Plus Improvement Mortgages

If you intend to buy a home that needs some immediate upgrades, a “purchase plus improvements” mortgage may be right for you.  This type of mortgage covers the purchase price of the home, plus any renovations that would increase the value of the property.  Finishing the basement, adding a deck, redoing the kitchen or bathrooms are all examples of improvements that can be financed with no need for a second mortgage.  For current homeowners, a “refinance with improvements” option may be available.

I can guide you through the process:

Step 1: Mortgage pre-approval
Arranging a pre-approved mortgage not only protects you if interest rates increase, it also gives you a clear price range for your new home.  At least a 5% down payment is required for a purchase plus improvements mortgage.

Step 2: Obtain cost estimates for upgrades
Once you have found a home, you need to get written quotes from licensed contractors on the renovations you plan.

Step 3: Mortgage application
For example, with a 5% down payment, your Invis Mortgage Consultant would apply to a lender for the lower of:

•     95% of the purchase price plus 95% of the cost to finish the renovations, or

•     95% of the “as improved” market value, determined by the institution which insures the mortgage after the renovations.

Step 4: Finalize purchase
Your Realtor and your mortgage broker will walk you through this part of the process.  The funds for renovations will be sent to your lawyer “in trust” when the mortgage closes.

Step 5: Complete upgrades
The lender will “hold back” funds for the renovations until the work has been completed and inspected, at which time the contractor can be paid.

Interested in learning more about this innovative mortgage option?  Call me and I am happy to explain the process to you.

Pre-payment options

There are two or three ways lenders allow borrowers to prepay their closed mortgage without incurring a penalty:

• First, borrowers are allowed to pre-pay a certain percentage of the original mortgage amount (generally between 15 - 25% of the original mortgage amount).    For example, if your lender offers 20% prepayment and your original mortgage amount is $200,000, you’re generally allowed to prepay $40,000 during a 12 month period.

• Second, borrowers are also allowed to increase monthly payment by a certain percentage (between 10% - 20%).  For example, if the lender allows you to increase your payments by 20% and your payments are $1,000 per month, you can advise your lender that you want to increase your payments to $1,200.

• The third way is to double up on  a certain payment date. For example, if your payments are $1,000 per month, you are allowed to pay $2,000 on a payment date,

You may find in your lender’s documentation under prepayment options, the ability to pay “15 + 20 + double up”.  This means that you prepay 15% of the original mortgage amount during a 12 month period, increase your payments by another 20% and lastly, you can double your payments.

Be sure to ask your mortgage broker about prepayment options.  If you don’t expect yourself using these options (or require a smaller prepayment option), your broker may be able to find a lender willing to provide a lower interest rate.