Merix Offers 50-50 Fixed-Variable Mortgage

Innovation seems to be returning to the mortgage market after a long dry spell.  For the past couple of months, all we’ve been hearing is lenders tightening their credit or pulling pulling out of the market.

Merix Financial recently announced their “50/50 Wise Mortgage”. This allows borrowers to take half of their mortgage as a 5 year fixed rate mortgage and the other half as a variable rate mortgage.  Merix already offers one of the most competitive variable rate mortgage at Prime + 0.40.  Their fixed rate is equally competitive.

The terms of this product mirror the terms of their fixed and variable rate mortgage.  The prepayment options are the same.  The interest rate to convert their variable rate is guaranteed to be their best fixed rate at the time of conversion.

This probably will work well for those who can’t seem to decide whether to go fixed or variable.  The borrower would like to take advantage of the savings of a variable rate mortgage and, at the same time, hedge their risks by locking in for half of their mortgage.

How to Get Approved for the Highest Mortgage Amount

With the credit crunch, many lenders have tightened up their lending guidelines.  Many borrowers are finding out that they no longer qualify for the same amount they did last year even with lower interest rates.  Here are a few tips on increasing the amount you get pre-qualified to purchase:

1. Choose the right lender – there are conservative lenders and there are aggressive lenders.  All lenders have consistent standard debt service ratio policies – That is, you are allowed to spend up to a certain percentage of your gross income on mortgage payments.  Some lenders allow you to spend only 32% of your gross income on housing payments while others allow you to spend up to 44% of your gross income.  This can result in a significant difference.  For example, a couple with a combined income of $60,000 and no debt can qualify for $265,000 with one lender and $390,000 at another lender.
2. Ensure your credit is in great shape – Your lending limits will depend on your credit.  With a credit score of 680, some lenders will allow you spend up to 44% of your gross income on housing payments.
3. Pay off all other debts (or reduce payments payments) – Every dollar you are required to pay towards other debts (e.g., car loans, credit cards payment, personal loans) reduces the amount you can use towards your mortgage.
4. Find a property with a mortgage helper – Rental income from a basement suite can significantly boost the amount of money you qualify for.  This will also depend on how your lender treats income from rental properties.
5. Use a mortgage broker – You can spend your time going from one lender to another checking your qualification limits or you could go to a person who can tell who which lender will be inclined to provide you with the right product for you.  The only one that can do this is a professional mortgage broker – Your bank cannot offer the wide variety of products and options that  a mortgage broker can provide.

Reasons to Refinance Your Mortgage

A recent study by the Canadian Mortgage and Housing Corporation (CMHC) showed that 71% of mortgage holders refinanced their mortgage prior to the expiry of their mortgage. There are many reasons why you should refinance your mortgage.

Here are my top 5 reasons:

1) To lower your interest rate or to lower monthly payments

This is an excellent reason to refinance your home. It may be that you locked in your mortgage at a higher interest rate. Perhaps, the interest was higher at the time. You should be aware that there is a cost to breaking your current mortgage and starting a new one with a new lender. Your current lender will probably have a pre-payment penalty. A professional at BC Mortgage will need to evaluate your transaction to determine whether the savings of the lower interest rate is greater than the costs of breaking your current mortgage.

Alternatively, you may feel that your mortgage payments are difficult to maintain. If this is the case, you may benefit from extending the amortization on your mortgage. It may be possible to extend the amortization to 35 years for an insured mortgage or even 40 years for a conventional mortgage (i.e., a mortgage with 20% equity).

2)  Your lender has left the mortgage business

You may have obtained a mortgage through a sub-prime lender, many of which have closed shop. If you took out a mortgage with Accredited Home Lenders, GE Money, GMAC, HSBC Finance or Xceed Mortgage, etc., you need to come in and discuss your situation as soon as possible. When your mortgage is up for renewal, these lenders will not be able to provide you with an automatic renewal. It is important that we review your situation so that when your mortgage is due an alternative lender can be found. This may mean that we work with you to bring your credit score up so you can qualify with another lender. Another major advantage is that there may be an opportunity to lower the interest rate on your current financing.

3) To consolidate debts into your mortgage

Debt consolidation allows you to incorporate your unsecured debts into your mortgage. The objective of a debt consolidation mortgage is to lower your interest costs and spread out the payments into a more manageable monthly cost.

For example, if your home is worth $300,000 and your mortgage is $200,000, you have equity of $100,000. You can increase your mortgage to pay off your credit cards. If you have good credit, it may be possible to take out as much as 95% of the value of the home. The additional money can be used to paydown your credit cards. This the interest rate on a mortgage is lower than any other debt.  Secondly, with a mortgage, your payments will be lower since the payments can be spread over the life of the mortgage (say, 35 or even 40 years amortization).

Click here to learn more about debt consolidation

4) To renovate your home

If you want to spend a significant amount of money on improving your home, you may be able to take out a lot more equity than you realized! BC Mortgage can advise you through this process. Both insurers — Genworth and CMHC, will insure new mortgages which are “topped up” for this purpose, and the total of your current mortgage and the new funds exceeds 75% of the current home value. Not all improvements are eligible, however. Pools and spas are typical “over-improvements” which may not qualify for a high-ratio equity take-out. Of course, if the total requirement is less than 75% of your home’s current value, you should have little trouble getting the “top up” you need — regardless of the degree of luxury you plan to add.

5) To take equity from your home

Of course, there is a myriad of other reasons why you may want to do an Equity Take-Out (ETO) mortgage. A common reason is to shore up your family’s finances. With the credit crunch and a possible recession, it is prudent to buffer your cash reserves. If you own a business, this makes a lot of sense since it is always easier to obtain financing when you don’t need it. If you apply during a business down turn, you may not get the mortgage you want.  Secondly, if the value of your home drops, the amount you will be allowed to borrow will be reduced. For individuals, this is also true since a job loss will make it difficult to refinance your mortgage with favorable terms and conditions.

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.