I can’t emphasize in enough words (although I will try) how many people are overly and unnecessarily concerned about their credit score when completing a mortgage pre-approval.
This widespread paranoia about getting bad credit from an inquiry likely originated from the need of greedy professionals to scare their mortgage clients about "shopping around." It's brainwashing, not reality. It's based upon someone else's insecurity about losing a client or even an effort to get business using scare tactics. In the spirit of trying to live in a "fact-based" reality, let's debunk this myth today. Maybe you've heard someone say, "Be careful not to shop around, you may get bad credit, which will ruin your chances of ever getting a mortgage." Oh, the horror! Spoiler Alert: It's not true, so please let the above die. Rest in peace. Here's my experience with this: Aspiring homeowners want to know what they will qualify for, but don’t want to provide the required information that will help a mortgage professional determine the answer to their question. Imagine walking into a doctor’s office with a cough and wanting to know if you have pneumonia while refusing to complete x-rays or additional screening measures. You will definitely never know whether you have pneumonia which can create complications in the diagnostic process. As a result, you may have pneumonia but never take medication, and suffer dire consequences. That’s a little dark and fortunately, not as dark as a getting a mortgage pre-approval, but still… the same idea holds true when it comes to financing. For starters, the credit score is a major factor in the approval process. Your income may be enough to service the mortgage payments, but without knowing your actual score, the answer about whether you are pre-approved is only speculative - and we don’t like to speculate in real estate, for obvious reasons. What’s the purpose of a pre-approval? A pre-approval is a pre-screening to the mortgage approval process. It helps you determine how much you can afford by reviewing your income, your credit score, and the property type you want to purchase. In the pre-approval process, a mortgage professional can also address any questions you have about the home-buying process including land transfer tax and other costs, high-ratio mortgage insurance, if required, an appraisal, and so on. It’s also a timesaving tool. Why look at property for sale when you don’t know if you will qualify for the mortgage required to purchase those properties? It’s common sense. Save time and energy, while also being considerate about the time and energy you will inadvertently force other professionals to waste including lawyers and real estate agents. What about that credit score? Does it hurt your score? Any time we pull your credit, for the sake of getting a mortgage, we consider it a “hard hit.” It will affect your score, however, it will not take you from having impeccable credit to somehow now being a borrower that has bruised credit. Not in the least. It’s an inquiry. That’s it. The good news is we can use one report for up to 30 days with all of our different lenders, if we are applying on your behalf, without the requirement to pull your credit again within this timeframe. Also, you can have your credit pulled for a mortgage application by different institutions and brokers for up to forty-five days and it will still only count as one credit pull which will get reflected in your scoring. So, for example, if you have an 830 score, a credit hit may bring it down to 800. Nothing major and nothing to concern yourself with when applying for mortgage financing or even getting a pre-approval as it won’t make you have bad credit or interfere with your ability to qualify for other loans. In conclusion, getting a mortgage pre-approval is a responsible initiative in the home buying process, which helps aspiring homeowners to become well-informed and astute real estate investors, while also helping them to save a tremendous amount of time. Do you have a question about getting pre-approved? Let me help you run the numbers. You may have plans to sell your house, but are unsure about what purchase price you can qualify for. You may be a first-time homebuyer and don’t know where to start. Whatever the situation, I can help. Seriously, I can. Sarah A. Colucci Mortgage Agent, Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849/ Email: sarah.colucci@coluccimortgage.com
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By: Sarah Colucci, Mortgage Expert
Why Invest Anyways? We define an investment as the action or process of investing money for profit or material result. There are many investments an individual can partake in, some being more lucrative than others. Not all investments are equal. Some pose more of a risk, which is why a person who wants to invest in various assets needs to ensure they truly understand and appreciate their personal risk tolerance level. A risk, specifically a financial risk, is an action that could cause monetary loss. Some investments, while they can churn an attractive profit, can also trigger a huge financial setback. Therefore, an investor needs to determine how much he or she can afford to lose and take measures to ensure they mitigate financial loss the best way they know how when investing. It’s the “mitigation” part of investing that often requires the help of professionals like real estate experts, lawyers, stockbrokers, financial advisors and so on - investing without knowledge or experience in any area can be dangerous for anyone who does so. At the banking level, there are only a few stealthy bankers who advocate for and encourage building a real estate investment portfolio. Mostly, investments such as mutual funds and RRSPs are the preferred product of choice sold throughout the commercial banking sector, regardless of an individual gaining substantial benefits or not. This is also why many people have minimal RRSPs and Mutual Fund investments instead of or besides sizeable real estate assets. Let’s think about an RRSP. An RRSP is a Registered Retirement Savings Plan. It’s a financial account for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. What are the main advantages of RRSPs? For most people, it’s tax write-offs at the end of the year. But, if someone’s income bracket is not high enough, where they pay a substantial amount of their income to taxes, the benefit of the yearly tax refund deteriorates. If an individual gets taxed at 50 percent of their income, for example, investing in RRSPs is more helpful in producing a larger tax refund than someone who gets taxed at 15 percent. Yet, ironically, those in smaller tax brackets still get sold the RRSP and are told it’s the best financial product of a lifetime - a concept full of flaws. The financial institution then locks away a person’s money until they retire and if they dare try to access those funds before then, it will require them to pay punitive taxes as a penalty. The idea with RRSP investments is that after retirement, although the funds saved away will get taxed as income, a pensioner will not require a large living allowance. Obviously, a 65-year-old will not want to travel, indulge and live an extravagant life. He or she will be fine earning 35 percent of their previous income. Or is this the case at all? Different people will want different experiences after retirement and therefore, will require a differing amount of yearly income. Therefore, investing in RRSPs is not universally imperative. It also definitely should NOT be the sole investment someone directs their money into over their lifetime. What about real estate? Again, here we talk about risks. What are the risks involved in investing in real estate, specifically purchasing rental properties? Like RRSPs, we also consider real estate a low-to-moderate risk. The obvious risks (there are others, though not as significant) are tenants not paying the mortgage (if there is one), and property value degrading along with it being worth less than the outstanding mortgage balance, which can pose an issue if the landlord needs to sell quickly. What are the chances of this happening? Not likely. The power of sale rate in Canada is less than 1% and the mortgage default rate is also negligible. Therefore, real estate can be a retirement plan for those that own property for the long term which means “real estate for retirement” excludes “property flippers” who want to renovate to churn a quick profit. It’s important to keep that in mind. Holding real estate is a long-term investment. The Logistics of Real Estate Investing If an investor requires a mortgage to purchase a rental property, then initially, the rental income generated on that property will get allocated to the mortgage payment. The rental payments, in theory, should always take care of the property’s expenses such as the mortgage principal and interest payment, property taxes and so on. In a perfect world, nothing should come out of the owner’s pocket and in fact, he or she should cash-flow on a monthly basis. With the right financial plan, the property’s mortgage can get paid off in just fifteen years, leaving behind an excellent source of rental income as a monthly cash flow for years to come before and after retirement. And that’s not all. When the mortgage gets paid off, partially or in full, equity becomes available. Equity is of utmost importance in the game of investing and in the simultaneous endeavour of creating a comfortable lifestyle; one that doesn’t require labour before and after retirement. Having more equity means having more value and more capital available. Having more capital opens up more opportunities to engage in further investments, further cash flow opportunities, and so on. Therefore, is an RRSP more superior to real estate? Why not have both? More importantly, why not engineer a retirement you desire? Sarah A. Colucci, Mortgage Agent, Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@coluccimortgage.com Big Banks & Self-Employed Individuals
By: Sarah Colucci, Mortgage Expert Yes, now read on. Many self-employed borrowers apply with major banks for mortgage financing but they are turned away because they don’t claim enough income to qualify. There are advantages and disadvantages to being self-employed, of course, but when it comes to getting a mortgage, the benefit of using tax-write offs to pay fewer taxes can interfere with obtaining the most competitive mortgage interest rates or even a mortgage at all. Major banks are strict when it comes to using self-employed income. To qualify applicants, they only use the average of the last two years of claimed income and not gross income. Some banks may allow self-employed income to be grossed up by 20 percent, but if the base income being used is already low, this may prove to be uneventful when qualifying for a mortgage. Therefore, “claimed income” is basically "net income", which means income AFTER write-offs related to running one’s business. Net income determines how much someone will pay in personal taxes and is reported as Line 150 on the T1 General and subsequent Notice of Assessment. Recently, banks have become more creative in finding ways to service these types of clients. For example, high net worth programs tend to help borrowers get financing if they can prove their net worth is substantially higher than the mortgage they are applying for. Additionally, equity programs are also available for borrowers who have a lot of equity in their property which ultimately helps serve those with a healthy amount of property equity but minimal self-employed (and even pension) income. Mortgage brokers also have access to these programs and a borrower can still work them to obtain big bank equity or net worth products. If Big Banks Say No. Some borrowers stop applying for a mortgage after being declined by their bank while others will go on to apply through the broker channel. In the case of being self-employed, it’s imperative for one to understand that alternative lenders exist for this precise reason: to service those borrowers big banks won’t. Brokers have exclusive access to alternative lenders that, in most cases, consider and appreciate gross income (with some reasonable write-offs) instead of solely relying on claimed personal tax amounts. This means that alternative lenders can consider bank statements to determine what income is coming through their account over a 12-month period for example, and also rely on a "Declaration of Income", rather than Notice of Assessments. Therefore, if a person is only claiming $20,000 a year, for example, they may qualify for the financing they desire if they can prove they are, in fact, earning more. Yes, rates are higher because the application is gauged on risk and having minimal income on paper does partake in this risk. But how much higher are mortgage interest rates when it comes to alternative lenders? Considering most self-employed people can use their operating expenses to reduce the amount of taxes they pay to the Canadian Government, a fair trade for *slightly* higher interest rates is in order. We say slightly higher because the mortgage rate can still be comparable to prime rates. For example, if the prime rate is 2.84%, the alternative rate can be 3.69%. - it’s higher but it’s not too much higher. Some people get confused between a private lender and an alternative lender. A private lender can either be a private corporation, an individual or a Mortgage Investment Company, also known as a MIC. With these lenders, a borrower can expect to pay more than 7%, interest-only, with large fees on both the front and back-end. Alternative lenders, on the other hand, are still Mortgage Finance Companies that are used on the prime lending side and therefore, are still regulated by the Government. This also means that they will still follow the bond market curve to determine their interest rates which keeps them competitive within the alternative space. Of course, alternative lenders also determine their interest rates based on the assessed risk of each application they receive which differs from big banks that don’t do this. For example, if you have a credit score of 680 and above, you will get the best rate. If you have a credit score of 600 and lower, the rate will be less favourable. The gray areas are why working with a mortgage broker can make things easier and more understandable and increases a person’s chances of getting the best deal. What about pension income? Many borrowers who are on CPP, Old Age Security and work pensions, for example, wonder if they can qualify for financing. Again, I'd like to reiterate, there are many programs that can assist a person with getting the appropriate and desired financing. As a mortgage professional that works directly with over twenty lenders who are changing their products to accommodate the needs of Canadian mortgage borrowers, I can help you navigate the process. So, before you start withdrawing RRSPs to fund your living expenses, talk to a mortgage professional. Sarah A. Colucci Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@coluccimortgage.com Vacant land can be a desirable investment because it can create various investment opportunities, such as the ability to lay the foundation for small to large scale development projects or provide the acreage required to support the construction of a custom home, for example.
Even savvy real estate developers buy acreage decades before they intend to develop on it to ensure they churn a substantial profit from building homes that will sell for much more and in a pricier market. With the exponential rise in property value that has occured in the last ten years in Toronto and the GTA, which has, unfortunately, pushed many aspiring homeowners out of homeownership altogether, many individuals are increasingly more interested in the idea of purchasing vacant land either as an alternative investment for the long term or to simply build their own house avoiding builder fees and inflated costs. The interest in vacant land has, therefore, generated many questions including which lenders provide this type of financing. Major Banks and Vacant Land Financing Often, major banks do not lend on vacant land. Banks finance either residential or commercially zoned dwellings, which act as security for the repayment of the loan. Without physical property situated on the land, most banks will decline financing. The main reason for such hardline policies is that banks are aware of the risks they may face when trying to re-sell it in a power of sale situation (if the borrower fails to make mortgage payments). In real estate, it is easier to sell a residential home than it is to sell vacant land. Banks are not in the business to lose money or unnecessarily increase their risk of financial setbacks, so therefore, vacant land financing is a hard stop at this level. In most cases, to finance vacant land through a major bank, a mortgage product such as a regular mortgage or home line of credit, would need to get registered on an alternate property the borrower also owns that is zoned commercial or residential. This "alternate property" would act as the bank's required collateral. Building A Custom Home on Vacant Land A borrower CAN get construction financing through a major bank as well as some credit unions in Ontario under select conditions and circumstances. What is Construction Financing? Construction financing allows borrowers to use mortgage funds to provide "draws" at predetermined intervals to complete the final construction of a home. Construction draws simply mean that the mortgage funds are not provided all at once like in conventional loans, but rather, they are provided in stages once certain elements of the construction process have been completed. When it comes to vacant land and construction financing, if the land needs to be financed, this would be considered the initial equity take out and can be used to purchase the land. When building a custom home, mortgage lenders prefer that the land already be free and clear of any encumbrances. However, in the event the land is not owned outright or can't be purchased free of mortgage financing, a Construction Financing Loan is a smart way to finance both the land and the construction of the dwelling simultaneously. If you've already consulted with a sub-contractor or property development company, and have plans to start building a property immediately, you may qualify for a construction mortgage with a major bank or credit union which can be facilitated through the broker channel. Depending on where the property is located, banks and credit unions can finance up 95 percent of the vacant land value. If you are working with a home builder, your mortgage can be insured through Canada Mortgage Insurance Corporation if the total cost is less than $1 Millions Dollars. What happens if you want to buy vacant land and have no plans of building a home right away and also don't have another property to mortgage? In most cases, if you don't own other properties that a bank can register a mortgage against to be able to give you the funds required to buy vacant land outright, you will likely require alternative or private financing through other companies. Most private lenders will lend a maximum of 80 percent loan to value, which means you would need to have a down payment of 20 percent or more. I specialize in vacant land financing. Please do not hesitate to reach out for pricing or more information. Sarah A. Colucci Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@coluccimortgage.com Tarion Warranty Corporation (Tarion) in theory, is a consumer protection agency that is supposed to financially compensate new homeowners who make valid claims about aesthetic or structural defects found in their home that builders fail to repair.
In reality, however, homeowners have had to contend with corruption and politics for years instead of good policy that protect them. As a result, Tarion's mission of “consumer protection” has remained questionable. Over the years, pressure has been mounting on the Ontario Government to regulate Tarion more closely mainly due to the shocking conflicts of interest present within the corporation's business structure, which has resulted in minimal transparency, credibility and even crime. One major area of concern is the fact that Tarion writes its own policies and regulates itself, which allows claim coverage (or lack thereof) to tip in favour of homebuilders, even allowing those with a track-record of failing to fix deficiencies to get re-licensed each year. In October of 2019, The Office of the Auditor-General of Ontario conducted an extensive Audit on Tarion called "Value For Money Audit." What it found were major deficiencies in Tarion’s policies that ultimately called for significantly more government oversight and recommendations, which Tarion has since agreed to follow. The Auditor-General proposed stronger measures to be put in place to protect homebuyers from a builder's failure to uphold their contractual obligations under the warranties and eliminate unnecessary timelines in the process that nullified valid claims. Here are a few of the problems the Auditor General uncovered while investigating Tarion: 1. Homebuilders could still register with Tarion regardless of how many times they denied to uphold their warranties in the past and did not fix deficiencies. Tarion found that in more than half of its inspections, builders had not honoured their warranties. For example, 6485 requests that Tarion assessed between 2014-2018 found 65 percent of the time, builders should have fixed items under warranty but did not. 2. Tarion dismissed thousands of requests for help from homeowners because the homeowners missed Tarion’s tight deadlines. 3. Homeowners can ask Tarion for help with defects in their homes covered by a one-year warranty by submitting a form - but only by submitting a form in the first 30 days or the last 30 days of that first year of occupancy (unless it is an emergency, for which they can make a claim anytime during the first year). Between 2014 and 2018, Tarion refused assistance on about 9,700 requests because the homeowners had missed the 30-day deadlines. About 1,300 of these requests had missed the deadline by a single day. Missing the first 30-day deadline does not disqualify the homeowner from the builder’s warranty coverage, but it does mean Tarion will not hold the builder accountable for its warranty obligation. In effect, these narrow windows mean people lose the right to get help from Tarion. The homebuyer protection plans in Quebec and British Columbia, in comparison, have no such 30-day deadlines. 4. Builders with poor warranty records continued to get licences from Tarion. 5. Builders were subsequently licensed by Tarion even when homeowners alleged that they acted dishonestly and broke the law. As of June 30, 2019, Tarion had a backlog of 41 complaints about builders’ dishonest conduct that it had not yet investigated. All of the complaints were outstanding for more than six months, with some dating back to early 2017. Five of the allegations were serious, including one where a builder refused to make emergency repairs that required immediate attention. In another case, a homeowner alleged that a builder broke the law by not having Workers Safety Insurance Board (WSIB) coverage for subcontractors, and by building homes without a Notice of Project from the Ministry of Labour, both mandatory by law. As of June 30, 2019, Tarion had yet to investigate these allegations or forward them to the WSIB and the Ministry of Labour—but it nonetheless renewed the builder’s licence in January 2019 despite these serious allegations, which appeared to have merit. 6. The Directory is compiled by Tarion for prospective homebuyers to consult when choosing a builder. The Auditor-General found that Tarion excluded 2,033 inspections that found warranty issues from 2014 to 2018 from the Directory because builders alleged that homeowners prevented them from honouring their warranty. However, their sample testing of 75 inspections found that 42 did not have sufficient evidence to support the builders’ assertions. 7. Tarion does not include other critical information such as Ontario Building Code violations, past convictions for illegally building homes, and the results of Tarion investigations into complaints against builders. 8. Tarion’s pilot program’s effectiveness in preventing illegal building is limited. In the past 10 years, Tarion has paid out about $19.8 million to homeowners to cover the cost of warranty repairs on 869 illegally built homes. Some builders engage in illegal building activity by declaring that they are building a new home for their personal use, and then selling the home for a profit. Tarion partnered with 15 municipalities to prevent these types of builders from getting municipal building permits. The Auditor-General questioned the overall effectiveness of this initiative because Tarion still had to investigate 37 individuals approved under the pilot program and convicted three of illegal building. 9. Tarion’s call centre did not always provide accurate and helpful information. Tarion operates a call centre with nine employees who field about 90,000 calls a year on average. We listened to a sample of 50 calls recorded between February 1 and March 31, 2019, and found that in 14% of our sample, Tarion’s response to caller questions was inaccurate and/or not helpful. For instance, without obtaining all the facts and inspecting the defect, Tarion told one caller that a roof leak was not covered by the builder’s warranty when, in fact, it would have been covered under certain circumstances. 10. Tarion’s senior management was rewarded for increasing profits and minimizing financial aid paid to homeowners. Bonuses to senior management totalling 30% to 60% of their annual salaries were based on increasing profits by, for example, keeping Special Audit of the operating costs down, including those of the call centre. Having such an incentive can affect the quality of service to the public. These approaches to compensation appeared more suited to a private-sector for-profit company than to a government-delegated not-for-profit corporation. 11. Tarion did not collect enough security from builders to cover payouts to homeowners. Tarion collects refundable security deposits from builders to cover the costs of any homeowner claims that it eventually pays out. However, Tarion bases those deposits on outdated information (for example, outdated home values that are lower than the homes’ current values), while paying out claims based on current values. As a result, it paid out about $127 million from the Guarantee Fund over the last 10 years, and recovered from builders only about 30% of the pay-outs. 12. Issues raised by Tarion’s own Ombudsperson not always resolved by Tarion. The Ombudsperson’s Office of Tarion raised concerns in 2009 and 2017 about the way Tarion investigated reported allegations of builders breaking the law or operating in a dishonest way. In 2010, the Ombudsperson recommended that Tarion always confirm directly with homeowners when builders claim that homeowners prevented them from fulfilling their warranty obligations. However, the Auditor-General’s review of a sample of 75 exempted inspections from 2018 found that Tarion still was not doing the verifications. As mentioned, Tarion has agreed to work with the Ontario Government to address its recommendations, which include Tarion discontinuing its monetary sponsorship to the Ontario Home Builders Association, not allowing one stakeholder to have an advantage over any other, ensuring that homebuyers receive sufficient time to familiarize themselves with the Homeownership Information Package to they understand the importance of the Pre-Delivery Inspection (PDI), significantly more audits of builders to ensure they comply with the knowledge shared to homeowners about the PDI, to eliminate the word “Warranty” from its name, to address the issue of warranty coverage beginning before a house is finished by redefining “finished house” for the purposes of homeowners’ warranty rights and coverage period so that the one-year warranty period commences only once the home meets his new definition of a finished house; or developing a warranty that will protect homebuyers for unfinished items in their homes once the home has met the minimum occupancy standard, and ensuring that the one-year warranty coverage begins only after the items are finished, or working with the relevant ministries to expand what must be completed to meet the minimum occupancy requirement in the Ontario Building Code so that new home buyers are appropriately protected by their warranty rights, and so on. For more information about the Auditor General’s recommendations of October, 2019, please click here. Sarah A. Colucci Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@coluccimortgage.ca Electronic currency is not a new idea but it is one that has been gaining momentum. Since the invention of the internet, people have been exchanging goods and services through online and digital technologies.
Most individuals around the globe use the internet regularly to shop and make exchanges, even going as far as using the Facebook buy and sell to transfer money to sellers. Therefore, there is a strong need for digital currency to be available. There have been many advancements to paper currency since the 80s, which include EFTs and Apple Pay, that enable consumers to use their iPhones to make purchases through their financial institutions. Currently, in Canada, over forty financial institutions are currently set up with Apple Pay, providing tech-savvy individuals with an easier and faster way to shop. Of greater importance, and the point of this article, is the fact that central banks all over the planet have been working with each other to foster a relationship surrounding central bank digital currency. On January 21, 2020, the Bank of Canada declared its plans to work with the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank and the Swiss National Bank jointly with the Bank for International Settlements (BIS) to “share experiences as they assess the potential cases for central bank digital currency (CBDC) in their respective countries.” Canada is therefore eager to continue an ongoing conversation about the implementation and eventual execution of digital technology and discuss its role in the evolution of cryptocurrency with other countries. Even China, the emerging superpower, has plans to implement its own digital currency, which is set to be launched through WeChat, a Chinese multi-purpose messaging, social media and mobile payment app developed by Tencent. Of course there are challenges which have slowed down the release of central bank currency which include governance and blockchain. In other words, who or what will control and regulate the exchange of digital currency? Where will all the data get stored? How will central bank currency differ from other cryptocurrencies like Bitcoin? The main difference between central bank digital currency and Bitcoin is central banks regulate their currency, and Bitcoin does not. People like using Bitcoin because transactions remain anonymous, albeit, in order to verify transactions, specific computer software is required. How does regular currency work? Paper currency is printed by central banks, but it's important to note that paper currency, in general, causes financial problems and volatility especially when the Governments of the world can simply print money to stimulate their economies. For example, China's injecting of $173 Billion into its economy to soften the expected blow from the Coronavirus devastation. In contrast, Bitcoin does not cause any financial consequences because it is not regulated by Government and works independently of global trade. With the eventual release of central bank digital currency will also come tighter regulations and the elimination of paper money altogether. Of course, one could argue this would be a good thing since it would prevent crime such as the billions of dollars in illegal money laundered around the world annually and stop things like tax evasion since transactions could not be processed with paper money, something the Government can't always track. However, with anything digital, comes many disadvantages and alarms to consider including: security breaches when it comes to personal information getting hacked, if digital currency is wiped out through theft, there isn't a paper cash source left to fall back on, not everyone is technologically savvy, and those below the poverty line may have trouble using cryptocurrency. Therefore, there is much to consider but given the evolution of currency, it's all the more likely digital currency will emerge as the primary mode of exchange. However, it will always perform one basic function, which is to act as an intermediary in the exchange of goods and services. Sarah A. Colucci Mortgage Agent, Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Have a question? Email sarah.colucci@coluccimortgage.com As the global economy becomes more uncertain and tumultuous, investors are flocking to the bond market. When investors become overly concerned about global events (like a pandemic sweeping the planet) and the effects those events will have on trade, they purchase more Government-backed bonds. This pushes fixed-rate mortgages down.
When more investors turn to the bond market as their haven, the price of bonds increase, which simultaneously pushes down bond yields. In the mortgage lending world, lower bond yields make the costs of fixed-rate mortgages lower. We can expect to see fixed rates drop between 5 basis points all the way to 20 basis points directly because of the coronavirus. So, for example, if fixed rates are 3 percent, we will see them go down to 2.80 percent soon. Variable rates get influenced by the Bank of Canada’s overnight lending rate which get determined at its meetings held throughout the year. With global uncertainty looming, we can expect Stephen Poloz, the Governor of the Bank of Canada, to reduce its rate in 2020. The overnight lending rate directly affects the Prime Rate banks and other mortgage lenders use that determine a mortgage’s variable rate. Mortgage rates in Canada went down when the world experienced the SARS outbreak, however, SARS was not nearly as infectious. It is odd to discuss mortgage rates going down in a pandemic type situation, especially because we don’t know its seriousness and how it will play out, but for those interested in paying off their mortgage sooner or getting a lower mortgage payment, there is a silver lining. Sarah A. Colucci Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Understanding How Mortgage Professionals Get Paid Is Critical To Avoid Getting A Bad Mortgage.2/1/2020 A borrower can access different financing channels to complete the mortgage process. They can apply with a major bank, mortgage broker, credit union or even directly with a private lender (without a mortgage broker’s involvement).
Having options maintains a healthy level of competitiveness in the industry, however, borrowers should also ensure they learn how industry professional get paid to avoid financing pitfalls. You may wonder how someone’s pay method can undermine the basic mortgage process and the universal business model of putting a customer’s needs first. Well, in the banking world, mortgage advisors that work directly at branch level are on a basic salary, which in theory, should keep them honest. However, they also get heavily incentivized with bonuses and pay raises if they meet or exceed a pre-determined sales target, and most of them can lose their jobs if they consistently underperform. When needing to earn big bank shareholders a certain profit margin, pressure to perform becomes intense and employees can end up pushing products and services that don’t necessarily service their customer’s needs which can undermine the process. For example, banks sell many products including mortgages, home lines of credit, personal loans, bank accounts, life insurance, investments and so forth. When many products are available to the public and are also part of the basic salary + bonus or commission model, it’s the perfect breeding ground for consumers to get sold multiple products whether or not those products help them financially. Consumers are sometimes concerned about “tied selling.” Tied Selling is the practice of providing a product or service on the condition that a customer purchases some other product or service. In Canada, tied selling is illegal, and consumers should know their rights to avoid becoming a victim. Although I am definitely not accusing big banks of doing this, there seems to be a fine line between incentivizing certain consumer actions in order to sell more products. Examples include big banks that offer more incentives for, let’s say, banking with them or offering a credit card, for example, that encourages the consumer to incur debt for travel points. Clearly, there will always be a greater push at the banking level for customers to sign on to different products, investments, etc. because of the basic pay models and the motivation to sell. Customers should make themselves privy to this information and perform a certain level of due diligence looking past possible sales tactics. I once worked with a mortgage borrower who had become distraught after learning that the life insurance premium he paid for 10 years was not a mandatory part of qualifying for his mortgage. He had dished out over $72,000 in premiums and only learned in the last year of paying that he didn’t qualify for the policy’s coverage to begin with. Big mistake, of course, but he was obviously pressured into thinking this was something he needed to take on to get a mortgage. In the real world, a case like this, could possibly be looked at as tied selling and again, is not legal. Therefore, as a mortgage borrower, it becomes even more essential to LOOK and READ what you are signing to ensure you understand all the terms. You’re probably thinking I will promote the broker channel, instead. Wrong. Our compensation model can present flaws, too. Unlike the banks that can only offer the bank’s products, mortgage brokers have access to both big banks and alternative lenders that include other mortgage finance companies and private lenders. And, although having a variety of lenders at our fingertips is a major competitive advantage, payment models from lenders can present challenges that can undermine the client's best interests. Mortgage brokers work on a 100% commission model and get paid an “origination fee” by the lenders they work with. Some lenders pay more and some pay less. With alternative and private loans, there may be a broker fee involved which can vary amongst mortgage brokerages because these lenders either don’t pay brokers nearly as much as prime lenders or even at all. A borrower who applies through a mortgage broker may get stuck with an inferior mortgage product because their broker may opt to apply with a lender paying the most commission instead of one with the best mortgage product paying less. (Many brokers will argue against this but as a mortgage agent, I can say this happens all the time. Some brokers will try to maximize their income potential which also can undermine the mortgage process.) Realistically, there is likely to be fewer instances of tied selling or incentivizing customers to use or sign on to more products through the broker channel because brokers don’t have access to banking products and they don’t have to reach quotas to keep their jobs, which means there is no pressure on the customer to choose other services or use more products. In reality, if a mortgage broker wants repeat business and to earn a commission, he or she will try to earn the trust of their clients. This practice can work in a borrower’s favour. Again, it is still very important that a borrower READ the fine print of their mortgage contract to ensure they understand everything from prepayment penalty calculations to transferability but knowing how each get paid can open ones eyes to what is presented in front of them. Sarah A. Colucci Mortgage Agent, Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 "Like" me on Facebook! Visit www.facebook.com/coluccimortgages |
By: Sarah ColucciSenior Mortgage Agent, Lic. M14000929 Categories |