No Down Payment?  No problem!

New RRSP Loan Program for 1st Time Home Buyers

Hoping to take advantage of the buyers market this spring but falling short on down payment funds? Traditional borrowed down payment options can be tough to qualify for and expensive. You’ve got to have perfect credit and be prepared to pay a premium on both your rate and default insurance fee to go this route. Perhaps you have already been declined by the bank – don’t fret,  there is another option.

I have a solution.

We are offering a program through one of our lending partners to help you save your down payment through an RRSP loan.

How does it work?

Call me. I can start an application to qualify  you for up to a $25,000 RRSP loan and start the mortgage preapproval process at the same time. Once approved,  you must wait a minimum  of 90 days before making an offer.  After this time you can then withdraw these funds as a down payment tax free through the First Time Home Buyers Program. 

Bonus! You have access to standard insurance premiums, qualifying guidelines, and best rates!  

Bonus! You get yourself into the spring market! 

 Bonus! You receive a 2018 personal tax adjustment! 

Call me anytime if you would like to chat further about this option or have any questions. It is always a pleasure hearing from you. 

During most of the last 28 years, choosing a 5-year variable at any random date would lead to lower interest costs for the following five years. The thing to understand is the last 28 years we have been in the greatest bull bond market in the history of the world, that means the greatest interest rate decline over the longest period ever. The last 28 years were a great time to have a variable rate mortgage. The question now is, what will be the average variable interest rate for the next five years?

• The first thing for a borrower to determine is, do they have the emotional ability to accept rate and payment increases during the term.
• The second thing is, do they have the financial skill to budget and pay fluctuating and higher payments, or do they like the stability of a fixed payment.

If they can deal with variability, we now enter the world of genies, tarot cards, and educated guesswork.

Interest Rate Overview, In the last 18 months

The Governor of the Bank of Canada says the “Goldilocks zone” overnight rate (not too accommodating and not too restrictive), would fall in the 3.5 -4% range (this range may be dropping). With a whole bunch of assumptions, please note that range is close to, if not a double, from current rates.  The Canadian Government and the Bank of Canada both are comfortable, expect, they are leaning towards/want higher interest rates.

Rates have gone up and are expected to continue going up as long as we have an expanding economy and rising inflation expectations. This is despite Alberta’s current economic state.

Predicting Rates for the Next five years.

Lock in and take five years in the higher 3’s(The 5-year Fixed):

• let’s say 3.79%, for example,
• $400,000 mortgage interest over five years $70,458.”

Here is a guess at future rates:

Take a variable and we will guess the Bank of Canada overnight interest rates rising by 0.5 % in the next six months by 1% in the next year after that, by 0.75 % the next year, at this point we would have prime of 5.5% and variable at 4.5% and in the last year and a half of our 5-year term have rates coming down by 0.75 %.  To summarize:

• Prime from 3.95% today up to 5.5% in three years or so and then back down a bit to 4.75%
• Guess what, interest charged over the five years works out to $69,700

We are as well, guessing on continued economic expansion and then a world or North American or Canadian recession of a mild sort. No vicious recessions. No expansion forever either. Expansion ending sometime in the next year to 2 years.

We come back to “what to do?”

A reasonable guess on rates suggests, the decision of fixed versus variable, it’s a tossup for the next half year or so. Then the traditional advantage for variable will likely become more obvious.

Last year when fixed rates were below 2.5%, fixed was a clear winner. That was one of the rare periods. However, as rates rise a bit and the economic cycle appears to become more traditional, our answer again is it really about emotional make-up… If you want interest rate and payment stability, choose fixed. If you want the most likely chance at lower interest charges, choose variable (Especially once the next cycle turns).

Many factors can play into the decision besides emotional make-up, financial cushion, debt service ratios, other major necessary purchases during the term, payout penalties.

It is a choice most people ignore and simply request a 5-year fixed, which is revealing in and of itself. People should at least consider Variable.

Article originally posted by: Croft Axsen – Broker Owner Jencor Mortgage Corporation

Happy New Year to all of my favourite Mortgagors!

It is the time of year for reflection, resolutions and goal setting. Financial goals are top of the list for many and it is a great time to do a  mortgage check-up. Consider this your Mortgage Prepayment Pep Talk!

Some of you will receive a bonus or annual raise this time of year, instead of letting this money be whittled away by fancy coffees and avocado toast why not allocate some additional funds to paying down your mortgage?

Many lenders will allow you to pay your mortgage off faster without incurring any penalty by:

1. Changing your Payment Frequency

This is often the easiest options for my clients, a minor change with a major impact. Switching from monthly payments to Accelerated Bi-Weekly payments can take years off of your mortgage. The lender will take your monthly minimum payment, divide this in two and you will have 26 payments per year.

On a mortgage of 400k on a 5 year term at 3.59% amortized over 25 years, switching from monthly to biweekly payments will knock almost 3 years off the loan. This pays it down by an addition $11,000 and also saves you $1051 in interest over the 5 years.

2. Increasing your Payments

You are also likely allowed 10, 15, or 20% increases to your regular payments without penalty and a few lenders will even let you DOUBLE those minimum monthly payments. Any increases are applied right to the principle balance and as a result reduce your remaining amortization and interest payable.

3. Lump Sum Payments

Sitting on some cash? Perhaps a portion of that annual bonus can be allocated to your mortgage loan. Your mortgage lender likely allows you to prepay 10, 15, 20% or more of the original mortgage balance per year without penalty. Again, this will reduce the amortization and interest paid over the term and gives you the flexibility of potentially paying the loan off IN FULL before the maturity date.

If mortgage prepayments excite you as much as they do me, and you would like a mortgage check-up or to review your prepayment options, I am always available. Let’s crunch some numbers and calculate your possible savings!

Current home owners can still purchase a new owner occupied property with as little as 5% down. This 5% down payment can be gifted, saved or even borrowed if the applicant is strong enough, subject to insurer approval.

This is a great option for home buyers who are struggling to sell their homes, or who, due to a shortfall in equity are not in a financial position to sell their current home.

How is this possible?

Most mortgage lenders will use a percentage of reasonable rental income on the existing property to help debt service the costs associated with this home. This percentage can vary from one lender to the next and some lenders are more aggressive with their rental offset than others.

In many cases approval amounts will be lower than if they were to sell and purchase a new home. However much depends on the client’s mortgage and personal debt load, and what their current home can rent for in today’s market. For some clients, if their current mortgage payment is low and possible rental income is high, their maximum preapproval amount is not affected at all.

To prove rental income what is required?

All lenders will accept a signed lease agreement to confirm monthly rent.

Some lenders will also accept a market rent evaluation in lieu of a lease to confirm rent. This means we can still use rental income to help a client qualify even if they do not have the home rented out just yet.

What is a market rent evaluation?

A home appraiser will draw up a letter for the lender to confirm the estimated market rent on a property based on the size and location. This typically comes at a cost of $50-150 to the client.

If your home is sitting stagnant on the market or you have a sales clause offer that may fall apart, this option is worth exploring. Should you or your  client want a second opinion to see if we can qualify to purchase without selling first, please do not hesitate to call.

I often meet with young ambitious individuals who are wanting to put a plan in place to get their foot in the door of the real estate market. It is common for these clients who are just starting out to have minimal or no credit ratings and often they are still working on saving up that 5% down payment. For these people, I will sometimes advise that an RRSP loan may be a good solution to both of these problems. They can help build their credit rating and worthiness by making regular instalment payments on the loan,  and at the same time they are building up a savings that can be used when they purchase their first home. It’s a win-win!

So, what exactly is the ‘Home Buyers’ Plan?

The CRA’s Home Buyers Plan (HBP) is a program that allows you as a first time home buyer to withdraw funds from your Registered Retirement Savings (RRSP’s) at the time of your purchase, tax free.

To qualify for this program there are a few rules and conditions that you as  a home buyer must meet:

• You must be a resident of Canada at the time of withdrawal. 
•  You must intend to occupy the qualifying place of residency within 1 year year after buying or building.
• The funds must be put towards the purchase of your  principal place of residence OR the purchase of a home for a related family member with a disability.
• The maximum withdrawal amount through this program is $25,000.
• The funds must have been in the RRSP account for a minimum of 90 days before redemption.
• You must not have owned any properties from January 1st of the 4th year before the year of withdrawal.

What’s the catch? 

These funds to have to be repaid. You are given 15 years to repay the RRSP’s. Typically you’re required to replay 1/15th of the total redemption per year back in to the RRSP. If it is not paid, this portion will be included in your income for that year. 

How do you apply?

You will need to request and complete the Form T1036 either from the institution that holds your RRSP’s or from the CRA website. This can only be done once you have entered into a written agreement to buy or build a qualifying home.

For more information please visit www.canada.gc.ca for forms and publications. 

One key component in your mortgage application is your credit rating.  Credit Scores are a 3 digit number ranging from 300-900, 300 being poor and 900  perfect – and almost impossible to attain.  Creditors will report your loans, lines of credit, credit cards, car loans, student loans and mortgage loan details to the credit bureaus (Equifax anortgaged Trans Union ). Your score is used by the lenders to help determine credit risk and how likely you are to pay back your mortgage as agreed.

When it comes to applying for a mortgage a higher credit score can result in better rates and terms, more options and higher approval amounts! So let’s talk about the major factors that will affect your credit score:

1. History

Your credit bureau includes the history of any loans or liabilities in your name or that you may have co-signed for. It tells us how long you have had each liability, and ideally we like to see  a minimum of 2 years reporting on the credit bureau of two trade lines / loans so show sufficient history.

Your payment history is also reported to the credit bureau. If you’ve missed payment on a loan this will appear, along with how many payments you may have missed and how late the payment was. Late payments will have a negative impact on your credit score.

When a financial institution does a credit check at the time of a credit application this is called an inquiry. Any past credit inquiries report to the credit bureau and the bureau will show us who pulled your credit and when.  Too many inquiries in a short period of time can also start to bring your credit score down as it can appear as though you are credit seeking and possibly in financial trouble.

2. Usage

Another factor in determining your credit score is your credit usage. You do need to use credit to build a great credit rating, but must use it responsibly. When it comes to credit card and other revolving debts you will want to ensure that you have credit available and are not overextended. Paying credit cards off monthly and / or keeping those balances well below the limits will increase your score and show the lenders you can manage credit wisely.  On the flip side,  if you max out or go over your limit on your credit cards or credit lines you can expect your credit score to suffer as a result.

3. Public Records

Public records include things like collections, bankruptcies, judgements and liens.   These can all have a longer term impact on your credit rating and it can take time to rebuild that positive credit history.  For example, a $50 collection from your internet provider for forgetting to return your cable box is a common one I see, and once paid back should have minimal affect on your rating. However, a Bankruptcy in the tens of thousands of dollars will of course have a much longer lasting effect on your credit worthiness and ability to secure a mortgage. It can take years to reestablish your credit in this case.

If you will be shopping for a mortgage in the near future I recommend a credit review. Give me a call and we can review your report together and address any potential issues now to ensure you can get the best mortgage possible when you purchase, refinance or renew your mortgage.

1.        Paperwork Prowess

Real Estate transactions are document heavy. They involve contracts, disclosures, waivers and more initials and signatures than you care to imagine. Let a Realtor tackle the paperwork for you. They are familiar with the documentation and terms used which can be an enormous help and can also save you from costly mistakes as a buyer or seller. Realtors have extensive knowledge on how to write up offers with conditions and terms to protect and benefit their clients based on their needs. They are also better equipped to help advise client on if and when any conditions can be lifted.

2.        Pricing Expertise

Realtors have access to the data, education, tools and experience needed to best advise on home values for both sellers and buyers. They look at market trends, comparable pricing, housing market conditions and how different neighborhoods hold value when advising their clients. This unbiased information is crucial when making an informed decision on either selling or purchasing a home and for achieving successful results.

3.        Industry Network

It takes a team of qualified professionals to ensure a real estate transaction goes smoothly. Realtors have an arsenal of reputable contacts in their back pockets to help with all aspects of a purchase or sale. Lawyers, Mortgage Professionals, Home Inspectors, Contractors, Home Stagers, Landscapers, Cleaners and Movers. I guarantee your realtor has someone they recommend with a history and track record of excellent service. Why gamble on a google search?

4.        Professional Expertise and Ethics

Realtors must adhere to the Canadian Real Estate Association’s (CREA) rules, regulations and strict code of ethics. They are educated professionals and it is their duty to offer honest and ethical advice. There are serious repercussions should a realtor act in a way that is deemed unethical.

Realtors are constantly upgrading their skills and education. Many will have niche markets in which they are considered experts, specializing in things like acreages, condos or luxury homes. Most of us only purchase a few properties in a lifetime and this may be your largest investment. Working with a seasoned professional who facilitates hundreds of transactions and has industry education and experience only makes sense.

Cory Lewis

Mortgage Broker, Jencor Mortgage

Every so often I have a client who does not qualify for a standard mortgage and will look at a rent to own as a potential option. Though I only have limited involvement in these transactions until the very end, I do try to educate my clients on the process and potential risks involved so they can make an informed decision.

The most common reasons for not qualifying would be that they either do not yet have a down payment OR perhaps credit issues that need some work before qualifying.

The property owner and the tenant will come to an agreement on the  purchase price and the contracts are usually set up with the tenant paying an initial deposit and a premium on regular monthly rent. For example, if market rent should be $1200 per month the client may pay $1600. The additional $400 per month is typically held in a trust account for the term of the rent to own contract, say 3 years. After the 3 years is up the cash in the trust account can be used for their down payment upon qualifying for a mortgage.

What could possibly go wrong? 

Property Value Issues: If at the end of the term the value of the property is not at least equal to the original agreed upon purchase price – the banks may not finance the home. For example, if the contract sets the price at 300K and values drop within the 3 years to 280K the client will now need both a minimum 5% down payment on the 280K value AS WELL as an extra 20K to make up for the value discrepancy. Appraisals are almost always required on ‘rent to own’ homes and this is the biggest issue I have seen over the last few years.

Qualifying Issues: Again, at the 3 year mark the tenant will have to qualify to buy the home. Mortgage rules are constantly changing so a buyer who qualifies based on today’s guidelines may not qualify in 3 years time. If the tenant happens to develop some credit issues within the 3 year contract or lose their jobs/take a pay cut ,they may not qualify to get a mortgage at all. Most rent to own contracts are based on 5% down payments at the end of the term. With less than a 20% down payment in the trust account – the mortgage default insurers (CMHC  / Genworth / CG) have to approve the buyers , property  and contract as well as the lender.

Owner Defaults: What kind of protection does the tenant have if the current owner of the home stops paying his mortgage or property taxes? Usually NONE. If the current owner stops paying the bank the property could be foreclosed upon while the tenant is occupying the property and fulfilling their end of the bargain.

What does the tenant have to lose? Often these contracts are drawn up in favor of the owner, not the tenant. If the tenant misses a rent payment or does not qualify at the end of the rent to own contract the tenant may lose some or all of their deposit and down payment in trust.

What should one do if considering a rent to own property? ALWAYS seek legal advice. Do not use the seller’s lawyer, It may cost you extra to have your own lawyer review the contract but it is important to have your own representation. Also, speak with a mortgage professional in advance. You will want to ensure that after the rent to own term is up that you have the best chance possible at qualifying for a  mortgage.

HOW MANY ACRES ARE YOU PURCHASING? 

For conventional mortgages,  lenders will finance a certain number of acres, a house & a garage. The number of acres that they will consider can vary based on the property location and the norm for that area. The minimum down payment can also vary based on the size and location of the land.  For example, a property that is close to a major urban area and under 10 acres would most likely be approved with 20% down payment. If it is a larger acreage 30+ acres and not within an hour of a major urban area, the minimum down payment will likely increase. 

For high-ratio / CMHC insured mortgages with a minimum of 5% down,  they will approve and insure the value of the house, garage and the `residential component` of the land. If the norm / average acreage size for the area is 20 acres, this is what they will approve in land value. If it is 160k – then this is what they will approve. However, if you purchases a 160 acre acreage and all of the acreages surrounding it are only 20 acres – CMHC will likely only give value to the first 20 acres of land and the buyers will have to pay out of pocket for the value of the remaining land as determined by an appraisal.

It is typically easier to secure financing on CMHC insured Mortgages and it is not uncommon for lenders to require the mortgage is insured even if the buyers have a 20% down payment based on the purchase price. If it is a large acreage, has outbuildings of major value or is a mobile or modular home – these are all things that could result in either a larger down payment requirement and / or mortgage default insurance. 

If there is no home on the property a mortgage is not available and one would require a land loan. Land loans typically start at a minimum of 25% down payment and go up from there based on the location, size and value of the property, they also often come at slightly higher interest rates.

WHAT ABOUT POTABILITY? No mortgage unless there is good water! Potability reports are needed for all well water and will be requested either upfront with the lender approval or at the lawyers before closing.

WHAT ABOUT ZONING? Country residential is the easiest to finance. However, if the land is zoned Agricultural, but used as residential (no farming or commercial component) the lenders and insurers will consider this as well. Agricultural & Farm land that derives income is more difficult to finance. Lenders are wary as it is difficult to foreclose on agricultural land and if the Agricultural land has a farming component or income lender options become much more limited and down payment requirements increase.

WHAT IF THE PROPERTY HAS OUT BUILDINGS? Mortgages are for a house, garage and land – and that’s all.  If the property has an out building of value the effective value of the property will often be reduced by the lender or insurer and this will affect the down payment requirements.

For example, if a client is purchasing a small acreage for 800k , and there is a brand new large heated shop, horse corrals and an arena on the property that the appraiser values in total at $160k , this would be deducted from the purchase price in the lenders eyes bringing the effective value down to 640k (800k-160k). The buyer would then need to have a minimum 5% down payment based on the 640k  effective value ($32k) PLUS 160k to make up the difference (value of outbuildings) for a total of $192,000 .  Even though the buyer is technically putting more than 20% down based on the contract purchase price, the lender and insurer would consider this to be financed at 95% of the value of the home, garage and land and a CMHC premium would apply. 

OTHER FINANCING FACTORS TO CONSIDER: You may need to allow extra time for conditions to be removed on acreage purchases as  CMHC appraisals and well water testing can cause delays. 

As always with mortgage financing the buyer plays an important role. For strong clients the lender may make an exception to their policies. 

It is true that 100% financing is no longer available however CMHC still allows for buyers to purchase a home with a borrowed down payment. This means I can assist buyers in securing a loan or credit line to cover the 5% minimum down payment and they can potentially buy a home with minimal savings.

Many lenders have dropped this program however there are still a few out there willing to consider this option. As it is a higher risk loan, the qualifying guidelines are of course a little tighter:

Clients must have excellent credit.

1. We are required to use a monthly payment on the credit line accessed for down payment in the debt servicing, so buyers will qualify for less than they would with a saved down payment.
2. Property must be owner occupied. No rentals.
3. Interest rates in most cases are fully discounted.
4. CMHC premium is slightly higher. With a 5% saved down payment the premium is 4.0% of the loan, and with borrowed it goes up to 4.5%
5. The bank may want to see that the client has access to enough money to cover their closing costs and legal fees. The standard requirement is 1.5% of the loan, however if we can provide a quote from a lawyer to prove they are lower this will often be accepted.

As with all mortgage there are general guidelines, no guarantees, and all applicants are considered on a case by case basis. There may be exceptions made by the lenders and insurers. Both the applicant and the property must meet their criteria.

If you or someone you know might benefit from this program, feel free to get in touch for more information.