By: Sarah A. Colucci
May 7th, 2018
Not everybody knows that mortgage broker fees are not mandatory and that they vary from brokerage to brokerage, individual agent to individual agent.
That's right. If you got charged a broker fee at some point in the past or are being charged one now, it wasn't and isn't mandatory. That doesn't mean the price was/is unwarranted, however; it merely implies the broker wants to get paid for their time and effort.
As a consumer, it always helps to understand how exactly mortgage brokers make a living. If you are aware of their pay structure, you will be able to readily determine if a fee is warranted or not. After all, nobody likes being gouged.
Let me explain...
Financial institutions, which include banks, credit unions, monoline lenders, etc., that work directly with mortgage brokers, all pay them a commission. In the broker world, this is called a finder's fee.
"A" lenders = great rates, excellent credit, fully verifiable income.
Any financial institution that is considered an "A" lender, meaning they offer the most competitive interest rates to those with the best credit and fully verifiable income, pay the most in finder fees to mortgage brokers. As a result, it's uncommon to see a mortgage broker charging a broker fee on what is considered an "A" deal.
I have heard of brokers still charging fees in addition to the commission they receive. They often do this if there was extensive work involved in getting the deal funded. Unfortunately, others "double dip" or get paid twice on the same file, which, in my opinion, is not an ethical business practice and gives the rest of us a bad name.
"B" lenders = unique financial situations, non-conventional income, bruised credit
Alternative lenders that offer slightly higher interest rates because the mortgage is deemed riskier do, in fact, pay brokers a finder 's fee. They just don't pay them as much as "A" lenders do. Usually, the work involved in closing the deal is the same, BUT some brokers feel they should always be making the same percentage of commission no matter what. Therefore, a fee will be charged in addition to the lower commission they are receiving.
Ultimately, it comes down to the broker's personal guidelines and what he/she feels they have done to justify their fee. Some brokers think getting paid from the lender (even if it is less) is still enough compensation and, in good faith, don't want to charge anything further.
How do you know if a broker fee is justified?
This is a conversation you need to have directly with your broker. For example, if you are closing an alternative mortgage for $500,000, and the brokerage fee is $5,000, know that your broker is already receiving a commission from the lender. You may want to see how the additional cost came to be realized. Was there extensive work done?
Private lenders = unique properties, deals that don't fit into the A or B category.
In this situation, there are NEVER any commissions or finder fees paid to the broker. Therefore, one will almost always get charged a brokerage fee. But again, the amount is not set in stone, and there is no pricing that is mandatory. Therefore, it's best you discuss the brokerage fee with your broker and how they arrived at their cost of doing business. If it feels like an uncomfortable question to ask, then you can always ask someone else or look elsewhere altogether. One deserves to feel comfortable in whatever they are doing especially with respect to finances.
Broker fees to exit
Nowadays, it's common to see brokerage fees charged even if the deal doesn't close. Usually, a document or fee direction is signed at the beginning, which states that should the deal not go through by no fault of the brokers', a fee will be charged. Meaning, if you change your mind after all the work is done, you will still have to pay. I had a deal like this recently, where the borrower was asked to pay a significant amount of money in the event he walked from the deal. He called me because he felt hesitant about proceeding with the other broker.
Here's a link to an article where Monster Mortgage charged a $10,000 fee to the people that decided to stick with their current lender. Read about the story HERE.
Usually, this puts people up against the wall and it doesn't end favourably.
What are your thoughts?
Very rarely, someone will call me and ask me what the difference is between a getting a mortgage through a bank and getting one through a mortgage broker. I won't give you the boring, biased list as most brokers do but I will tell you the truth. So, why do some people choose a bank and why do others want a broker?
Firstly, marketing is a significant factor in all of it. Marketing and advertising shape a consumers perspective about which route is the safest. However, in my opinion, no matter how much money gets spent on advertising, advertising will never teach you, the consumer, about what you need to know. In fact, advertising does quite the opposite - it withholds what you need to know so you can make decisions based on misaligned beliefs which in turn, makes banks and other lenders billions. Think about that.
If you're like most consumers out there, you don't spend your time researching mortgage terms and various contracts, sorting through the fine print. Why would you? That's not your job. It's the duty of your mortgage professional whether they be in the "branch" or your local mortgage brokerage.
Does this always happen, however? Does the consumer still get educated on various mortgage contracts? Sometimes they do, which is excellent, but most times, unfortunately, they do not.
The reality is if you choose to obtain financing directly from one particular bank there isn't a whole lot of mortgage contracts to sort through and explain to you. That's because the bank can only offer you their mortgage products. You may not see the problem with this since the rate is reasonable, for example, but failing do your homework in this area can cost you ALOT of money.
Here's what I mean. There are a few components to every mortgage, which left unchecked, can result in a substantial financial loss (think in terms contracts).
Do you know the pre-payment industry is a secure multi-million dollar revenue generator for most banks and various other lenders, even those accessed through the broker channel? The reason it's a reliable stream of PASSIVE income is that most consumers don't understand how penalties get calculated until they're in a situation where they are trying to sell their home or refinance their mortgage. You're probably thinking you've heard this all before and it can't be that bad. Well, it's definitely BAD NEWS. Firstly, it's your hard-earned money, and secondly, if you knew of lenders that had a more favorable way of calculating penalties at the beginning, you wouldn't be dishing out a $17,000 prepayment penalty, for example, just because your life situation changed and you need to sell or refinance.
Why brokers prevail in this area.
Good brokers will always pair you with the best lender for you. Believe it or not, some lenders offered through the broker channel have the lowest forms of pre-payment penalties around and often, they offer even better rates than your bank, too. Why not ensure you get the best rate and the best set of terms?
To become mortgage-free sooner, you'll want to pay down your mortgage as soon as you can. DO SOMETHING TODAY, if you can. Switch your mortgage payments to bi-weekly, accelerated if you're currently paying on a monthly basis. You'll shave your mortgage amortization down a few years just by completing this straightforward task. Over the next twenty or so years; you will pay way less interest to your financial institution and much more principal to YOUR equity bank.
Now, let's say you decide to do this TODAY and your bank won't allow it. It then becomes an issue of how much you are allowed to pre-pay within a given year. Ahh, the caveat - and also why prepayment privileges are essential. You'll want to be signed up with a lender who offers very flexible and generous prepayment options. I'm happy to say that lenders through the broker channel provide great privileges, some much more than your everyday bank.
Simply stated, banks do not offer the most flexible service in this ever-changing world of having no time. All appointments must be completed at the branch or adhere to rigid timelines. Closings also take longer due to the corporate and political process that must take place. Banks are hardly ever available on their cell phones or outside of business hours. Brokers, on the other hand, are usually available more often. This means you get more attention and in turn, a better understanding of what you are doing. It's a way more personal experience. So, if you don't like the corporate environment and want to have a more "real" experience, you'll probably feel much better working with a broker you trust.
Approvals that banks do not dare give.
If you're self-employed and or have bruised credit, you may feel shunned as a loyal bank customer. I hear the same thing over and over again, which are the voices of disappointment when it comes to banks not being able to offer mortgage financing to their long-term customers. Brokers have many sources they can utilize for borrowers who don't claim much on their taxes due to being self-employed or those who have poor credit. You can still accomplish your goals in real estate by working with someone who understands where to place your application. Believe it or not, I've had some borrowers come to me who were declined by a major bank but were later approved, with a BETTER rate, with another lender. Funny the way things work out sometimes, isn't it?
Due to marketing and penniless gossip, some consumers fear the high-costs associated with using mortgage brokers to complete financing. I'm here to tell you this is information is not true. Most times, when arranging a standard mortgage such as the one you would obtain at the bank, for example, there is no fee payable by the consumer to the broker. Times when there would be a fee, for example, is if you arranged a private loan and there is no compensation getting paid to the broker. Sometimes fees are payable if the work that got done was extraordinary or took a significant amount of time. This is the truth. Of course, all of these aspects of a mortgage deal would be discussed beforehand to ensure everyone is all on the same page and in agreement. I won't lie and say that not all brokers charge fees. I've unfortunately witnessed brokers who have charged astronomical amounts of brokerage fees to borrowers... this is to say, you must find someone reputable to work with and understand why you are paying what you are.
For the most part, mortgage brokers receive compensation directly from the lenders they use.
Thanks for taking the time to read this article. It's not to say banks are this evil entity no one should use. Banks have their place. My point is brokers create competitiveness in the market because we can de-monopolize banks and their stronghold and bring better deals directly to the consumer.
For all of your mortgage needs, call 647-773-4849.
By: Sarah Colucci, Mortgage Specialist
February 15, 2018
It's challenging to save money when our monthly mortgage payment is almost the size of our pay cheques. For the many of us with larger mortgages, we wonder when we will become mortgage-free or how we will be able to achieve more savings earlier.
Many people often overlook their mortgage terms. In the 6-10 page document called a mortgage approval, there are some strategies listed that we can use to become mortgage-free sooner -these strategies can also help to maximize our savings.
Let's have a look at what we can do today to move towards a better financial future tomorrow.
1. Changing your payment frequency.
If you don't know how mortgage payments can affect your amortization period, then you may currently have your mortgage set to "monthly."
If your mortgage gets paid on a monthly basis, it may be done so out of convenience. BUT if you make this simple change TODAY, you can save yourself years of interest payments down the road.
Why I hate monthly payments: More time in between payments for interest to accrue & you will never shorten your amortization period.
What can you do?
I recommend Biweekly or Weekly, ACCELERATED, payments. Switching your frequency to bi-weekly or weekly means you will pay off principal much faster, reducing your amortization period and reducing how much interest you pay in the long run. This is because there is less interest accruing in between payments.
For example, if your monthly payment is $1,000 then paying bi-weekly means you will pay $500 every two weeks. If your frequency is "accelerated," then twice a year, you will make three payments a month, which will result in two extra principal payments each year. Also, there is less time in between each payment, meaning less interest is adding up.
In the end, by making a simple change like this one, you could pay off your mortgage up to five years earlier. So, instead of paying for 25 years, for example, you could relish in five years of no mortgage payments at all. Think about what you could do with all the extra money!
2. Increasing payments
You are allowed to increase your mortgage payments each month depending on what prepayment percentage your lender allows.
If you choose to increase your payment by $100, for example, you can reduce your borrowing costs and become mortgage-free quicker. Some lenders allow you to increase your payments by up to 100%. By doing this, you are paying more towards principal faster and paying less interest on the overall mortgage balance.
To do: If you are unsure of whether or not you want or can increase your monthly payment, start small. Try $50 a month, for example, and ask your lender how much interest that will save you over the life of your mortgage. You may be *pleasantly* surprised.
3. Make lump sum payments
Your mortgage contract allows you to make lump sum payments without a penalty. Most lenders offer prepayment privileges between 5-25% of the original principal balance. Tax advantage of this tool!
Tip: Tax refunds, for example, can be applied towards your mortgage balance to reduce your amortization period significantly.
Have questions about your mortgage?
I'm always here to help. Contact me today or call (647) 773-4849. Consultations are always free of charge.
For over twenty years, mortgage interest rates in Canada have lowered, making a "mortgage maturity date" an event looked forward to by many borrowers. That's because, at the end of their mortgage term, borrowers traded higher interest rates for lower ones and even consolidated expensive unsecured debt into their home loan. They acquired the benefits of lower monthly payments and more room for monthly savings.
Today, things have changed. Bidding wars are no longer typical. Houses for sale are flat (some with no offers). New mortgage rules make mortgage qualification extremely challenging, and interest rates are increasing.
According to Bank of Montreal, 47% of mortgages are set to renew within eight months, and according to betterdwelling.com, rate hikes would hurt approximately 63% of mortgage holders in 2018. That's because 30% of mortgages are currently variable rates. And, in light of the new drastic and consecutive rate hikes initiated by the Bank of Canada, fewer people will be comfortable taking a variable rate product.
The reality is striking.
What can borrowers do today?
When it comes to mortgage approvals, appraisals are almost always required by banks & other various lenders. Appraisals determine a property's value, so, in order to refinance and even consolidate unsecured debt, the value must be sufficient. With homes becoming more difficult to sell, and purchasers experiencing financing difficulties, the value of home prices are slowly decreasing. This translates to lower appraisal values.
One way borrowers may find it difficult to cope with rising interest rates is if they have a fair amount of unsecured debt. Credit cards and other loans can become very costly and difficult to pay down. Refinancing or debt consolidation may no longer be an available option for the many of Canadians who rely on their home's equity to bail them out of more expensive debt.
One should seriously consider refinancing soon to optimize on the following:
Feel free to call with any questions.
Wong, Daniel. "Bank of Canada: Half of Canadian Real Estate Mortgages Will Renew By Next Year." Better Dwelling. November 29, 2017. Accessed February 04, 2018. https://betterdwelling.com/bank-of-canada-half-of-canadian-real-estate-mortgages-will-renew-by-next-year/amp/.
"BMO: '47% of Canadian mortgages are due to reset within 1 year'." The Globe and Mail. November 29, 2017. Accessed February 04, 2018. https://www.theglobeandmail.com/globe-investor/inside-the-market/bmo-47-of-canadian-mortgages-are-due-to-reset-within-1-year/article37122628/.
Financial books I recommend:
Bank of Canada announced today it has increased it's short-term rate by a quarter point to 1.25. All big banks will increase their Prime Rate to 3.45% tomorrow. Royal Bank of Canada is the first to implement this change. CBC News. (2018). Big banks move to match Bank of Canada's rate hike. [online] Available at: http://www.cbc.ca/beta/news/business/bank-of-canada-rate-decision-1.4490918 [Accessed 18 Jan. 2018].
Some highlights over the last week:
What does this mean?
A variable rate product will go up .25%. So, if the rate is 2.3%, it will now be 2.55%.
Why timing is everything in a volatile market.
There are many changes occurring in the real estate market and they are all happening very fast. At the beginning of the month, a new stress test was implemented, which now has borrowers qualifying at 2% higher than the contract rate. Today, more bad news, interest rates have gone up, again. Many would argue that these changes are happening too rapidly, and they are right. Unfortunately, by the time most come to understand what is going on and how it will impact them, it will be too late for them make any changes to their financial situation.
Here's what I mean.
The new stress test will take about six months to ripple through the real estate market. As more people find it increasingly harder to qualify for financing, sellers will have to start to reduce their prices to move property. This is the outcome OSFI hoped for. Some experts predict a decline of property value by 40% or more.
The cooling of the market is great for purchasers, however, not great for the many people who rely on their home's value.
Who do these people include:
Let's talk about the first group of people.
Canadians have a large amount of unsecured debt. Student loans, car loans and other personal loans often take up a large allocation of a person's pay cheque. And, for the last ten to fifteen years, homeowners have enjoyed a real estate market of property value increases and endless possibilities. For example, people have been able to refinance and consolidate debt (often minimizing the pain of large interest payments), triple their net worth by purchasing investment properties using their home's equity, put their children through school, buy family cottages and so on. All of this with the help of low rates, increasing property value and easier mortgage qualifying criteria. Today, the curtain of this dream is slowly coming to a close.
In January, the second stress test which now makes borrowers qualify at 2% higher than the contract rate. In 2016, the first stress-test, which wiped out over 30% of first-time home buyers, mortgage programs for the self-employed and many equity programs. In the last 6 months, rapid interest rate hikes. It may be too fast for Canadians to even grasp what this means for them.
In order to refinance debt into a first mortgage, property value must be substantiated with an appraisal. An appraisal can be 30-60 days old. In a declining market, an appraisal is a crucial factor since if the property's value cannot be confirmed, problems with financing will occur. For example, lenders will only offer up to 80% of the home's value in a mortgage (if the borrowers qualify), and so, if the appraisal cannot confirm adequate value, an application to refinance will not be approved.
Why is this important? If borrowers have debt they need to consolidate, now is the time to seriously review one's finances. There is nothing worse than being trapped in monthly, interest-only payments at 19.999% interest, WITHOUT the possibility of debt consolidation.
So, homeowners who have unsecured debt need to realize the current climate and act accordingly.
Many retired people will want to liquidate their homes soon in an effort to downsize and put money in the bank. If property value decreases drastically, this diminishes their retirement fund. In this case, retired individuals can look into the CHIP/reverse mortgage program while property values can be substantiated today.
As anyone can see, a homeowner needs their home's value for many reasons, if not just for security. The market is very volatile and many consumers aren't sure where it's headed. And, since the market is obviously no longer one of decreasing interest rate and more lackadaisical mortgage terms, consumers should look and most importantly, plan ahead.
Many borrowers are not aware of the different compensation models for both mortgage brokers and banks. Further, they are usually unaware that different lenders pay brokers different amounts of commission. Why is this important?
Firstly, any consumer needs ensure that they are in fact, getting the best deal. If a broker has a few possible financial institutions they can submit an application to, then it's important they don't submit to a lender paying them the most but instead, one offering the best deal to the borrower. A borrower's life and financial goals should not be meddled with - this isn't a casino!
When it comes to interest rates, they may seem good to the borrower but are they the best? Another question that should be asked: are the terms of the mortgage the best? Is there flexibility within the mortgage contract? Are there any lenders offering something better? And if so, what are their terms?
Because most people are not aware of how mortgage brokers get paid to begin with, they are surprised to find out that there are indeed different amounts of commission being offered to brokers. There are over 20,000 mortgage brokers across Canada, so it's important that borrowers choose to work with those not motivated by "how much compensation" but rather, "is it the best deal for the borrower?"
This isn't to portray bank representatives as angels, either. Most bank specialists are also incentivized by bonuses, raises and in most cases, their employment. This means they are graded on how much volume they do or in other words, how many products they sell. Therefore, borrowers also want to ensure they are not put into a mortgage product just because the person at the bank needed to reach their monthly quota.
When you purchase an investment property, eventually, if you sell it, you will have to pay Capital Gain's tax. No one will argue the fact that paying this tax is unfair. But, instead of complaining about it, let's look at one primary way to minimize this tax.
How does Capital Gain's tax work? Let's say you invested $10,000 of your money into an investment property. Within a few years of owning that property, you decide you wanted to sell it for $50,000. Capital Gain's tax would be the difference between your original investment of $10,000 and the sale price of $50,000. Half of the resulting $40,000 would get taxed at 50% (20,000) at your current personal tax rate. In other words, only the difference of $20,000 would have to get taxed.
So, if you are retired, your overall tax would be less than if you were earning a full-time income, so this means timing also plays a part in how much tax you pay.
What's exempt from Capital Gain's tax? Your principal residence is not subject to any tax. The Tax law permits that you don't have to pay any tax on the profit you make from selling your primary home. You can do this once a year. So, in the event you spot a bargain on the market, you could improve the property while living in it. This is just one way you can significantly increase your capital, tax-free over many purchases.
Source: DAKU, D.15 secrets the taxman doesn't want you to know Daku, D. (n.d.). 15 secrets the taxman doesn't want you to know. Nassau, Bahamas: Eagle Pub.
Have a mortgage question?
By: Sarah Colucci (January 8, 2018)
Consumers are aware that mortgage brokers and financial institutions flight to save their client's money. Competition is intense on all fronts. Credit unions, major banks, monolines and, of course, in between themselves (i.e., Mortgage brokers vs. in-house bank and credit union staff). So, how does a consumer pick the best avenue for financing?
Mortgage rates are usually the main highlighted item that somehow convinces consumers that they will get the best deal. Websites such as ratespy.ca and ratehub.ca elude that interest rates are the most crucial factor in getting a mortgage. The names of these websites also display their objective. Interest rates are essential; however, prepayment penalties and the flexibility of the mortgage are just as significant. In my opinion, it's unfortunate that consumers are not publicly alerted about the consequences of only thinking about the rate.
Take pre-payment penalties, for example. The prepayment penalty business is a multi-billion dollar industry. If a customer is initially set up to fail because they signed a lousy mortgage contract, the interest rate they received won't matter. For example, in the all-too-common situation of a purchaser locking into a five-year fixed rate. Here's how. Firstly, if they got a mortgage with a financial institution that uses higher-than-usual posted-rates (ex. using the Bank of Canada's benchmark rates to calculate their penalties). If that purchaser needs to exit their mortgage within the term because of life circumstances, they will pay the most amount of money to do so. On the flipside, if they got the same mortgage with a lender that didn't use the Bank of Canada's benchmark rates but, instead, used lower rates in their calculations, their penalty would be smaller. This difference could easily equate to over $10,000 in savings for that purchaser. BUT, in reality, financial institutions, who are in the business to make money, keep their revenue streams flowing from the ignorance of the ordinary borrower (and from working with the wrong professionals, too). Also, professionals who may not be able to show their clients the benefits of thinking outside of just the rate may lose the war against "rate shoppers."
When it comes to flexibility.
The devil is definitely in the details when it comes to mortgage contracts. Most borrowers want to pay less money for their mortgage - that is their primary objective. So, they erroneously believe that getting the best rate equals lower monthly payments which then equals being mortgage free sooner. Unfortunately, this is not always the case, and a simple assumption like this could have serious financial consequences.
When certain lenders offer their "lowest rates," the terms are usually punitive. This means that real money-saving privileges like doubling up on or increasing monthly payments are not allowed. When a borrower can increase their mortgage payment or double up on their payments, more principal, and less interest are paid. Missing an opportunity to do this has the reverse effect of what they initially set out to do - be mortgage free sooner.
Extra fees/mortgage broker and bank compensation model
There is some confusion amidst the general public about how mortgage brokers get paid. It's a no-brainer that both the bank and the broker channel compete for business but how do each get paid and how can that affect the money the consumer will save or spend?
Firstly, mortgage brokers can get paid two ways. 1. They can charge a broker fee. 2. They get paid by the financial institution that approves the borrower's application.
When a financial institution approves an application for a residential mortgage, the broker is paid by them. This payment is called an origination fee. What this means is the lender will pay the broker a commission for referring an application to them. The borrower will not pay any fees. Sometimes, depending on the work that was involved in getting the file approved, a broker may choose to charge a broker fee, which would be paid by the borrower. In this case, it would depend on who the purchaser decided to work with as NOT ALL brokers charge a broker fee on top of the compensation they are already receiving.
In some cases, there will be no compensation to the mortgage broker from the financial institution. Usually, this happens when arranging commercial and private loans. If a purchaser is organizing this type of financing through a mortgage broker, they should expect to pay a brokerage fee.
The main benefits of working with a mortgage broker are that their success depends on the following:
1. getting a borrower approved
2. finding them the best deal by consulting a wide range of lenders, including but not limited to major banks and credit unions.
3. generating repeat business and a referral source.
Compensation model for major banks
Mortgage Specialists employed by major banks are usually not accredited and don't have any specific certification with governing bodies (for example, mortgage agents and brokers are licensed by FSCO). They typically get incentivized by the bank they work for based on the volume they do. For example, their raises and bonuses and in some cases, even employment, depend on them arranging to finance property and/or offering other credit products. There are no fees ever charged to the borrowers concerning lender/broker fees.
Some of the downsides of working for major banks include:
1. limited resources to consult when applying for approval. Meaning, the banks don't have access to the funds of many other lenders currently available.
2. Not licensed (less information available to the consumer).
Benefits would include no fees getting charged to the client, waived appraisal fees (which are usually paid for by brokers as well).
Overall, the main lessons borrowers should learn are:
1. Mortgage contracts have "fine print" which should be read carefully by borrowers to ensure they are getting the best deal.
2. Borrowers shouldn't rely on what a mortgage broker or bank specialist tells them. They should do their due diligence - ask questions, read the contracts.
3. The interest rate, although significant, is not the most critical part of a mortgage contract.
4. Calculate prepayment penalties with multiple lenders to see the cheapest option before you sign on the dotted line.
If you're self-employed, you may have felt the sting of new mortgage rules and regulations. They may have interfered with your ability to get financing and if they haven't, they will soon.
That's because the Stated Income Program that allowed borrowers to qualify using a higher salary amount, is no longer available. For example, if you claimed $20,000 on your income taxes, you could qualify using $60,000 worth of annual income. Your income would get confirmed by the lender's discretion about whether or not it was likely you did, in fact, earn more than you claimed.
With the stress-test in effect and new rules on the horizon, self-employed are going to find it even harder to secure competitive interest rates and qualify for an adequate amount of mortgage financing.
If you weren't aware, major banks and other "A" lending facilities, require a two-year average of Line 150 (claimed taxes) for the self-employed. If those numbers don't add up to what you require to be approved, your application will get declined. Add the new stress-test to this, that makes borrowers have to qualify at 4.99% or higher, financing with a major bank is somewhat of a miracle.
So, what does this mean?
Self- employed borrowers have two options: 1. Take a higher interest rate from an alternative lender who doesn't have to "stress-test" its borrowers and can also work off a Statutory Declaration declaring Income and bank statements or 2. Claim more on their taxes and pay more to the Government, forfeiting some of their tax privileges.
When it comes to who can help.
In the new year, it will come down to which brokers can offer their self-employed clients better deal and rates. The relationships brokers make with lending partners will be paramount to the services they can provide. Mortgage Edge, with whom I am affiliated, has made 2017 a year of reaching exclusive lending deals with select lenders not made available to every brokerage. These lenders work with equity (favouring equity over income) and exclusively self-employed individuals.
In conclusion, if you are self-employed then what the new rules mean for you is being offered a slightly higher rate than what is deemed the most competitive. So for example, if current rates are 3.25% for a five-year fixed rate mortgage, then you may be offered 4.2%.
Depending on your financial situation, it may be worth to take a higher interest rate and still have a chance at home ownership or consolidating unsecured debt to save money, then to pay more income tax unnecessarily. Figuring out what works best is usually done in a comprehensive evaluation of both scenarios and determining what works for you.
If you have any questions, please feel free to contact me, and we can go through your options together.
Most people have heard about the new mortgage rules that will be implemented January 1, 2018. The new rules are a continuation of a stress-test that was issued back in October of 2016 that applied to high-ratio and all insured borrowers. The test made qualifying for a mortgage a lot more difficult since instead of being able to qualify at the bank's contract rate, high-ratio borrowers had to qualify at a hypothetical interest rate, being the Bank of Canada's overnight lending rate which is currently 4.99%.
In January of 2018, new rules mean all borrowers, regardless of their down payment size, will have to qualify at the either, the contract rate + 2% or the benchmark rate of 4.99% (currently), whichever is greater.
As you can see, having to qualify by much more stricter criteria, will only mean fewer borrowers will be able to qualify for financing. This is precisely the reason for such measures. Inadvertently, while less people can qualify, those selling their homes will have no other choice but to reduce their sale price. So, in this case, we may see the housing market decline drastically with some experts suggesting a correction of beyond 40%. But is this the only scenario that may play out? No.
The new mortgage rules are implemented by the Government and therefore, only apply to Federally regulated institutions like major banks. There will be other options for borrowers and there may be some unintended consequences of the new stress test that will negatively impact younger borrowers as well those who are already considered low-risk.
For one, alternative lenders who don't have to adhere to such criteria will become very competitive and a much needed go-to lending source. Therefore, if more borrowers are accessing an alternative source of financing, housing prices may not be affected. At the same time, however, more people will be entertaining higher-interest loans that are offered within shorter terms. For example, a one or a two-year term, since alternatives don't typically offer five-year terms. Their most favourable rates are those with shorter terms attached. This is not exactly the plan the Government had in mind and perhaps, the Government didn't realize that major banks are not the only ones lending mortgage money.
Some credit unions will be a great source for borrowers when they have been turned down by banks, although some of them have already been using their internal stress -test long before even the first stress-test was introduced.
Mortgage brokers - the good ones, meaning the ones who have access to a plethora of both credit unions and alternative lenders, will be the best source of financing regardless of whether a borrower was approved at a major bank or not.
But remember, and I say this honestly to benefit you, the consumer, mortgage brokers typically get compensated less by credit unions and alternative lenders and therefore, brokerage fees will be something borrowers need to be made aware as they calculate their total cost of borrowing.
Additionally, not all mortgage brokers have access to every lender who may be able to offer competitive rates and not have to adhere to Government stress-test regulations. This is why it's crucial that borrowers shop around and consult a few different sources and even mortgage brokers to ensure in a tough market, they get the best deal.
What does all this mean if you buy before January? Well, if you are a high-risk borrower, you will get to qualify using 4.99%, which may change after January. You may end up having to qualify at over 5.5% if you wait, which could be a deal breaker.
If you are a low-risk borrower, meaning you have 20% down or more, currently, you get to qualify at the contract rate being approx. 3.09%. After January, you too will have to qualify at either 4.99% or the contract rate, plus 2%. This also may be a huge deal breaker for you.
If you have any questions about qualifying for a mortgage, or want to know about your existing mortgage approval or pre-approval - and whether it's still valid, please do not hesitate to contact me at any time. I would be happy to assist you at no charge.
You can call directly 647-773-4849.