15 May

purchasing an assignment

General

Posted by: Sarah & Jonathan

What is typically seen in an assignment purchase in Real Estate is the following.  One party purchases a property pre-construction from the builder.  Prior to taking possession, they sell their right to buy this property to a third party (party two), who is the new purchaser of the property.

 

It can be of benefit to purchase a property through an assignment.  Since the property is not yet complete, you can usually get it a little below the market value.  If you are looking at purchasing this way, a few things to keep in mind:

 

–          Right to assign – Does the seller have the right to assign the property?  This should be written in their original purchase agreement

–          Layout & space – Often you’re not able to see the unit as it’s not yet complete, so review the plans and make sure the space, layout & view are what you’re looking for.  All of these will affect the future value of the condo.

–          Comparables – Check the value of similar properties in the area.  If you’re working with a realtor, they should be able to assist with this.

–          Mortgage – Many lenders have restrictions on assignment purchases.  Some will not do them at all, and others will honor the original purchase price only, not the new price based on the assignment.  In the latter case, additional money may be needed for the down payment to make up the difference.  If you’re working with a good mortgage broker, they can help.  Since they work with a variety of lenders, they know which will finance based on the assigned price.

 

Purchasing a property on assignment can be great way to buy real estate.  Prior to doing so, do you due diligence to ensure there are no surprises.

17 Jun

Paying a Big Price for the Big Banks

General

Posted by: Sarah & Jonathan

Not all mortgages are created equal, and this is especially true when it comes to the way that some lenders calculate their penalties.  For the majority of fixed rate mortgage contracts, the penalty is described as the greater of 3-months interest, or Interest Rate Differential (IRD).  What is not typically explained is how IRD is calculated.

 

Before talking about the different way the IRD penalties are calculated, I’ll give a brief explanation of why they are in place.  As a mortgage lender, to ensure profitability, they are relying lending that money for the full length of the term (let’s say it is 5 years).  If rates remained constant and someone breaks their mortgage, the lender receives a small penalty (3-months interest) and should then be able to allocate the same money towards another mortgage at a similar rate.

 

A few years ago however, five year fixed mortgage rates fell from above 5% to below 4%, and in the past year to below 3%.  To compensate the lender, should the borrower break the rate they had at 5.25%, and get a new rate at 3.75%, an IRD penalty would be applied (5.25%-3.75%=1.5%).  At the time they broke this contract, if they had 3 years remaining, the penalty would be 4.5% (1.5% x 3 years).

 

As I indicated earlier, when it comes to penalties, not all mortgage are created equal.  Below is a list of current bank post rates, discount rates & Canada bond yields.  When calculating the penalty, a few lenders will use a discount-to-discount calculation (this is primarily with non-bank “A” lenders), some will use a posted-to-posted, or a posted-to-discount (these two are primarily used by the banks (RBC, BMO, etc.) & some will use discount-to-bond yield, or posted-to-bond yield (these last two are primarily with lenders offers ultra discounted rates

 

                                            Posted                  Discount              Canada Bond Yields

1-year                                   3.14%                    2.79%                    1.13%

2-year                                   3.14%                    2.69%                    1.15%

3-year                                   3.65%                    2.65%                    1.43%

4-year                                   4.54%                    2.99%                    1.47%

5-year                                   5.14%                    3.09%                    1.53%

 

For an example of the difference in penalties, let’s assume the following:

– Mortgage size = $300

– Term = 5-years

– Mortgage rate = 3.09%

– Client sells their house and breaks the mortgage at the end of year 3 (2 years remaining on the mortgage

– At the time of the penalty, rates are same & the mortgage balance is $250K

 

– Each of the penalties is calculated as follows:

= Initial rate – rate of remaining term x years remaining x mortgage balance outstanding

For discount-to-discount = 3.09% – 2.69% x 2 x $250,000 = $2,000

For posted-to-posted = 5.14% – 3.14% x 2 x $250,000 = $10,000

For posted-to-discount = 5.14% – 2.69% x 2 x $250,000 = $12,250

For Discount-to-Bond = 3.09% – 1.15% x 2 x $250,000 = $9,700

For Posted-to-Bond = 5.14% – 1.15% x 2 x $250,000 = $19,950

 

As you can see, there is quite a difference in how the penalties are calculated.  I’ve spoken with many clients who fight to save 0.1% on their mortgage rate.  On a $250K mortgage, this 0.1% would save them less than $250 per year.  In trying to save a few hundred dollars, I’ve seen many people cost themselves thousands, or tens-of-thousands of dollars in penalties.

 

Before you sign your next mortgage contract, ask your broker or bank representative to explain how the penalty is calculated.  Most of the descriptions of the penalties are very complex and difficult to understand.  To simplify this, look for the words posted or bond rates.  If they are included in the penalty description, the mortgage you are looking at may be more expensive than you think.

16 Apr

Purchase Plus Improvements

General

Posted by: Sarah & Jonathan

Searching to find the right home is quite challenging.  There are a lot of things to consider – is it a good neighbourhood, are there good schools close by, shopping, close to work, or parks.  Once you’ve found the right neighbourhood, finding a great home can be more of a challenge, as often the homes in great shape have multiple interested parties (which can drive up the price). 

Many people will not look at homes that require work, as coming up with the down payment is hard enough – they don’t have the additional funds for any renovations the house may require. 

What if there was a way to buy this home & build the majority of you home improvement costs into your mortgage?

Something which is not talked about very often is a purchase plus improvements loan.  This type of loan is available through many mortgage lenders, as it’s a program supported by CMHC and other mortgage insurers.  This will allow the home buyer to purchase a house in need of some upgrades, and following completion of certain stages of the renovations, the majority of the costs will reimbursed by the mortgage lender, and build into the mortgage.  This program can be used for any renovations which increase the value of the house – which generally includes kitchen & bathrooms. 

Many banks do not promote this program, as they would rather offer you a high interest credit card or line of credit to use for these renovations.  This is a deterrent for many home buyers, as $10,000 on a credit card could run about $250 to $300 in additional payments (on top the mortgage payment).  To include this same $10,000 into the mortgage at current rates would cost less than $50 per month.

The same program could also be issued on a refinance.  This can be very helpful as current regulations cap refinances to 80% of the home value.  If you’re looking to refinance to complete renovations, yet this will run over 80%, this may be another way to access a little more money (as they may look at 80% of post renovation value).

It is important if you’re looking at purchasing a home, completing some renovations and using this program to discuss this with your mortgage broker at the time of application.

To discuss this or any other type of mortgage needs, please contact Sarah Makhomet or Jonathan Tillger at Dominion Lending Centres Mortgage Village – 416.901.7410.

2 Apr

What is better – a fixed or a variable rate mortgage

General

Posted by: Sarah & Jonathan

Before talking about which is better, it’s important to first understand the difference between a fixed and a variable rate mortgage. 

With a fixed rate mortgage, your rate and payment remain the same for the term of the mortgage.  Since the interest rate does not change throughout the term, you know in advance the amount of each payment, and the amount of interest you pay during the term.

With a variable rate mortgage, both the interest rate and payment can change throughout the term of the mortgage.  At the start of a variable term, the rate is usually set in relation to the prime rate – for instance prime less 0.35%.  As the prime rate changes, the rate will change accordingly.  As an example, the current prime rate is 3.0%, so if the mortgage was set at prime less 0.35%, the current rate would be 2.65%.  If prime rises to 3.5%, the rate charge on the mortgage would change to 3.15%.

With a variable rate, the payment may remain fixed throughout the term, or it may change (depending on the policy of the lender).  If the payment remains fixed and the rate changes, what will then change is the percentage of payment which is applied to principle versus interest.

 

When you’re in the marketing for a mortgage and trying to decide whether a fixed or a variable rate will be better for you, there are a few things you may want to consider:

 

– Can you qualify for both a fixed and variable rate mortgage?

With recent changes in mortgage regulations, most mortgages that are either variable rate, or less than a 5-year fixed term, must qualify on the benchmark rate.  What this means is, despite the fact you’re getting a rate of 2.65%, you must qualify based on the payments being at the “benchmark” rate (currently 5.14%).  If you’re applying for a 5-year fixed rate however, you can qualify at the contract rate (currently around 2.89%).  Based on the mortgage size, some clients will only qualify for a 5-year fixed term.

 

– Are rates likely to rise, fall or stay the same over the term of the mortgage?

In either a falling rate environment or en environment where rates are flat, a variable rate mortgage will typically save you money.  In a rising rate environment, fixed rate will typically do better.

 

– Am you likely to sell my home or refinance mid term?

It’s important to look at your penalties to break your mortgage.  With most variable rate mortgages, the penalty is usually set at 3-months interest.  With most fixed rates, it’s the greater of 3-months interest of the Interest Rate Differential (IRD).  IRD can be quite significant, especially in a falling rate environment.  Before signing a fixed rate mortgage contract, it’s important to understand how IRD is calculated, as every lender calculates it different, and some can be quite severe – even in a rising rate environment.

 

– What is the current spread between the fixed and variable rate?

With a variable rate mortgage, you typically get a better rate (at the start of term), however the trade-off is less stability and the opposite for a fixed rate mortgage.  At the time you’re applying, how much of a rate premium do you need to pay for the rate security of a fixed rate mortgage?

 

– Are you comfortable with fluctuations in rates and payments, or do you want to know exactly what you’re paying every month?

Most people would feel great if their rate and payment were to decrease, but how would you feel if it increased, and now more money had to go toward your mortgage payment?

 

What are we currently recommending to our clients – based on current market conditions, many clients who are traditionally variable rate clients, are proceeding with fixed rate mortgages, for a few main reasons:

– There is very little (if any) spread between the variable and fixed rate

– In the short term (1 year) rates are anticipated to remain relatively flat.  In the mid to long term, it’s anticipated that rates will rise.

 

As for which is better, a fixed or variable rate – there is no right answer.  It’s important to understand  the pros and cons of each, so you can make an informed decision that is right for you.

20 Mar

Understanding Amortization

General

Posted by: Sarah & Jonathan

When you’re applying for a mortgage, there is sometimes confusion with respect to the amortization.  Putting it simply, the amortization is the number of years it will take you pay off your mortgage.  This is not to be confused with the term of the mortgage.  As with most things, there are both advantages and disadvantage to the length of the amortization – A longer amortization will keep the payments lower, and with this more affordable.  A shorter amortization will pay the loan off quicker and could save tens of thousands of dollars in interest.

Based on current rates of around 3% and a $400K mortgage, a 25 year amortization would cost about $1892 per month and total interest over the 25 years of about $168K.  The same mortgage based on 20 years would cost about $2215 per month & $132K in interest.  The 20 year AM would save about 36-thousand dollars in interest over the life of the mortgage.

Over the past few years, there have been some significant changes brought about by regulators with respect to maximum amortization periods.  Currently, the maximum amortization for any insured mortgage (less than 20% down) is 25 years.  In 2012, that was brought down from 30 year, and 35 a year earlier.  If we go back a few years prior to this, we had 40 year amortizations. 

Keeping the same numbers ($400K mortgage & 3% rate), with a 25-year amortization, would need about $80K of household income to afford this mortgage.  For same mortgage with a 30-year amortization would require only about $72K of household income.

If you have the 20% down payment, there are still options to get a 30 year amortization.

The question next becomes, does a longer or shorter amortization period make more sense for you.  Before answering this, you need to fist look at both your budget and your goals.  Another consideration is what will happen when the mortgage comes due for renewal (from the current term), as rates may be significantly higher than the current low rates.

I’ll run through an example with the chart below:

Initial Mortgage

Initial Rate

Initial Amortization

Payment

  Balance at    5 years

Remaining Amortizaion

  Renewal     Rate

  New     Payment

$400,000

3%

25 years

$1,893

$341,897

20 years

5%

$2,247

$400,000

3%

20 years

$2,215

$321,091

15 years

5%

$2,531

 

Looking at this chart, if they were comfortable with a payment of about $2,200 per month, then taking the 20-year amortization may make sense.  In 5 years however, if you started with the 20-year amortization and rates are back in the 5% range, your payments would increase to a little over $2,500 per month, which may make your mortgage a little too expensive.  Taking the 25 year amortization today however, would keep your payments within your comfort level in 5 years.

Of course, it’s difficult to predict where rates will be in 5 years.  My advice in most circumstances is to take the longest amortization possible, and select a mortgage with good pre-payment options.  This keeps your required payment lower, with the option to pay more.  Any additional payment will go entirely toward principle which will reduce the overall amortization & borrowing costs.  This gives a few more options to keep payments within your comfort range should rates rise in the future, and also gives more flexibility should circumstance change (such as illness or job loss) and you’re not able to maintain the higher payment.

When your applying for a mortgage, speak with your mortgage broker to make sure you’re getting the  mortgage that best suits your needs.

14 Mar

Your down Payment

General

Posted by: Sarah & Jonathan

The next few posts will be geared towards first time home buyers, today talking about down payment the Home Buyers’ Plan & mortgage default insurance (CMHC).

The minimum Down Payment required for the purchase of a house is 5%, though the minimum may be higher based the purchasers’ circumstances.  This can come from an individuals’ savings, investments, sale of another property, gifted (from a close family member) or in certain circumstances can be borrowed.  In most circumstances, if the down payment is pulled out of an individuals’ RRSP, this amount would be treated as taxable income, however if the they qualify as a first time home buyer, this can be taken tax free.

(First time) Home Buyers’ Plan – this is where the individual is taking money from their RRSP to use for the down payment or closing costs for the purchase of a home.  A few criteria must be met to qualify:

1 – Must qualify as a first time home buyer

2 – Money being used must be in the RRSP account for minimum of 91 days.

This money can be removed without being treated as taxable income.  It then needs to be paid back to the RRSP account in equal installments over 15 years, beginning 2 years after the home was purchased.  If this is not paid back in one particular year, the money for that year will be treated as taxable income. (as an example, if $15,000 is taken out in 2013 under this program, beginning in 2015, $1,000 must be repaid to the RRSP account.  If in 2017, the $1,000 is not repaid, then this amount will be treated as taxable income for this year).

The limit per home buyer is $25,000, so if a couple is buying a home and both are first time buyers, each can remove up to $25,000, so a total of $50,000.  If one person is a first time home buyer and the other is not, the first time home buyer can still use the program.

Mortgage default insurance – Commonly known as CMHC, is the insurance premium which is added to the mortgage should the buyer not have a minimum of 20% down payment (please note, there are circumstance where more than 20% may be required).  CMHC is one of the insurers, though they are not the only ones (Genworth & Canada Guarantee are the other two).  The premium is a percentage of the loan, and the percent decreases as the down payment increase.  This is added to the mortgage & amortized over the life of the mortgage.

These premiums are transferable, so if you are selling a house with an insured mortgage, and subsequently purchasing a new one (where the new mortgage will also be insured), your mortgage broker can apply to have the default insurance moved from one home to the next.  If the mortgage is increasing in value, there will be some costs, however there could be thousands of dollars in savings compared to paying the full premium.

14 Feb

Valentine’s Day & Credit

General

Posted by: Sarah & Jonathan

It’s Valentine’s Day, the day for flowers, romantic movies and candle lit dinners.  On this day, when you’re sitting across from the one you love, there is nothing more romantic than discussing credit.  Alright, so that is probably not true.  Sometime later however, when you’re looking to start a life with your Valentine, there is nothing less romantic than finding out they have bad credit and you’re able to buy the house you want together.

 

In North America, credit is incredibly important.  Unless you have hundreds of thousands of dollars in the bank, you credit is a major factor in your ability to buy a house or lease a car.  Many online purchases can only be done with a credit card.  While credit does not necessarily determine how much money you may have, it does speak about your character and whether you’re responsible with money.

 

One of the leading causes of trouble and breakups in relationships is finances.  So on Valentine’s day, have a wonderful romantic day with the one you love, and don’t think about or discuss credit.  Tomorrow though, when you’re thinking about this great person you’re with, and deciding if this is someone you’d like to spend your life with, credit is something you may want to seriously discuss. 

4 Feb

Using your home’s equity to invest in RRSP

General

Posted by: Sarah & Jonathan

With RRSP season in full flight, a lot of you may be wishing you had funds available to invest in your RRSP.

 

If used correctly, an RRSP investment can reduce your income tax and at the same time, build wealth for your future. To take advantage, many Canadians are opting to use the equity in their homes to come up with sufficient funds to contribute to their RRSP each year.

 

Do you have large contribution room in your RRSP. If you do not have the funds available to invest, I will take the time to calculate the long-term cost-benefit savings of utilizing the equity in your home. In many cases, the compounding benefits of long-term investments and tax deferrals could outweigh the newly invested funds.

 

Knowing the options that are available to help you achieve financial security over the long-term will help you save for a better future.

 

Call us today to find out about our line of credit.  We cover legal and appraisal costs to set it up!!!

10 Dec

Purchasing on Assignment

General

Posted by: Sarah & Jonathan

What is typically seen in an assignment purchase in Real Estate is the following.  One party purchases a property pre-construction from the builder.  Prior to taking possession, they sell their right to buy this property to a third party (party two), who is the new purchaser of the property.

 

It can be of benefit to purchase a property through an assignment.  Since the property is not yet complete, you can usually get it a little below the market value.  If you are looking at purchasing this way, a few things to keep in mind:

 

–          Right to assign – Does the seller have the right to assign the property?  This should be written in their original purchase agreement

–          Layout & space – Often you’re not able to see the unit as it’s not yet complete, so review the plans and make sure the space, layout & view are what you’re looking for.  All of these will affect the future value of the condo.

–          Comparables – Check the value of similar properties in the area.  If you’re working with a realtor, they should be able to assist with this.

–          Mortgage – Many lenders have restrictions on assignment purchases.  Some will not do them at all, and others will honor the original purchase price only, not the new price based on the assignment.  In the latter case, additional money may be needed for the down payment to make up the difference.  If you’re working with a good mortgage broker, they can help.  Since they work with a variety of lenders, they know which will finance based on the assigned price.

 

Purchasing a property on assignment can be great way to buy real estate.  Prior to doing so, do you due diligence to ensure there are no surprises.