Appraisals

Determining the market value of your home is an important piece of the mortgage financing puzzle.

First of all, appraisals are different from inspections. Inspections are a quality check; they look for defects and damage in a property. Appraisals determine property value based on comparable sales in the area within a certain period of time. (there are other methods, but for residential real estate the “comparable method” is the most common.)

You will need to get an appraisal when you are dealing with a conventional mortgage, or, in other words, a mortgage where the loan is a maximum of 80% of the value of the property. The reason you need an appraisal in this situation is because the mortgage is not being insured by CMHC or another one of the insurers. Because of this, the lender will need the additional security of the appraisal to determine the property’s value.

Appraisals are not terribly expensive, typically in the $250.00 price range. Some lenders have a specific list of appraisal companies that they work with, others do not.

Appraisals are particularly important when it comes time to refinancing your home. How much money you can borrow against your home completely depends on your home’s value. For example, let’s say you want to refinance your home to pay off some high interest debt, renovate your bathroom and take your wife/husband/partner on a vacation. (You can borrow up to 90% of the value of the home, but for the sake of this example we’ll do 80% to avoid the extra cost of insurance.)  If the appraisal reveals a market value of $350,000, you can borrow 80% of that, or $280,000. For this reason, it’s important as a home owner to keep an open mind when it comes to looking into their home’s value.

Insurance – why, how and when

There are tons of different kinds of insurance out there, but today I’m going to talk about some of the personal coverage you should definitely consider having if you’re currently a home owner or a soon-to-be home owner. I’m not talking about CMHC Insurance which is designed to protect the lender; I am talking about specific insurance policies you can buy to protect yourself, your family and your assets.

Although it’s not always nice to think about the “what ifs”, it’s important to have a plan in place should something unfortunate happen. People put a substantial amount of their life’s earnings into their homes so it makes complete sense to protect the investment with a diversified insurance portfolio. The main types of personal insurance a home owner should have are life, critical illness and disability. Essentially, these three components help to protect your assets in the event that you die, are unable to work or become seriously ill by providing financial coverage. You pay a monthly premium for having them in place.

One thing to bear in mind with most insurance policies is that the earlier you get them, the cheaper they are. From an insurer’s point of view, someone who is a 26 year old female is a far smaller risk than a 63 year old man almost at retirement. More risk equals higher monthly premiums. That said, get the coverage early and your payments stay the same for the entire length of the policy. Some policies last 30+ years, so there is definitely some value to be had. The 26 year old in the example was a client of mine who elected to go with life insurance. Her monthly premium was $32.00. The 63 year old, a different client, was quoted a premium of close to $1,200.00. No brainer. Get the insurance early while you are young and healthy.

Just like shopping for a mortgage, you should speak to a licensed broker when it comes time to look at extra coverage. An  insurance broker will have access to a multitude of insurance products (rather than just one that a bank will have) and will be able to explain the subtle differences between all of the different policies. If you don’t know an insurance broker, talk to your financial planner; they will be able to help you. If you don’t have a financial planner, drop me a line and I can put you in touch with one.

It’s a beautiful fall day in Vancouver. Get outside and enjoy it for a bit!

Amorti-who??

When you get a mortgage, one of the decisions you will need to make is how long of an amortization period to select. The amortization is the total length of the loan expressed in years. This period of time is then broken down into “terms” ranging from one to ten years. Each term is a contractual period where you make specific payments at a specific rate and frequency. For example, you may have a 5-year fixed rate mortgage on a 25 year amortization. That means that at the end of the term, we sit down again and find out where the best mortgage options lie for you.

Why select a longer amortization period? Doesn’t that mean paying more interest? Well, yes and no.  Sometimes buyers are forced to select the longest amortization period of 35 years simply so they can qualify under a bank’s debt servicing guidelines. 35 year amortization periods mean lower monthly payments, but more interest paid. Longer amortization periods also mean that you will pay more in CMHC insurance. (0.20% of the mortgage amount for every 5 years that you extend. That can add up.) So far, this all means that your overall cost of borrowing is getting up there.

That said, suppose you are the type of person that has income that fluctuates on a monthly basis, such as a contract employee or a 100% commissioned sales person? Maybe the lowest possible payment might simply be what you can afford after a slow month. The nice thing about a mortgage is that you can always pay more towards it, but you can never pay less. Let’s suppose that you went for a 25 year amortization and your payments were $1700/month. You are contractually obligated to pay that $1700 no matter what. If, however, you went for a 35 year amortization on the same mortgage amount (say 350,000), your monthly payment would only be $1200.

So what?

This is where pre-payments come in. Most mortgages will allow you to pay anywhere from 15%-25% extra each month. The effect is that by making extra payments, you are actually shortening the amortization period because the extra amount goes straight to the principal of the loan. I won’t bore you with the math, but trust me…it works.

So, if you have a 35 year amortization, you are a) guaranteed the lowest required payment per month and b) able to pay more each month if you’d like to offset the extra interest costs of the extended amortization.

You also may want to think about an extended amortization if the idea of renting your property out is a possibility. Again, having the lowest monthly payment necessary on the property could protect you in months where you may have a vacancy and have to pony up the cash yourself.

Happy shopping!

Building your lending relationships

Something I love about this job that I love is the part where I get to put on my consumer advocacy hat.

Last week I had a mortgage client that made an interesting decision. Rather than going with a mortgage that I had arranged on their behalf, they decided to go with their bank for their mortgage.  What was surprising about this decision is that the product that their bank was offering was inferior not only in terms of the rate, but also with the pre-payment privileges. (All lenders will allow their clients to pre-pay a certain amount extra both monthly and annually to lower the overall cost of borrowing.) Further, their bank was going to continue to charge them $13.95/month in banking fees whereas the product I had offered a free chequing account.

I was stumped. I called my clients and asked them what their reasons for staying with their bank were. At the end of the conversation (and we covered all topics…thankfully I didn’t have bad breath or something like that), it was resolved that they simply felt that by staying with that bank, their relationship would be strengthened for future banking they may need to do. All the numbers and reason in the world couldn’t away them.

Was this the best decision the clients could have made? Hard to say. Only they could make the decision that they knew was right for them. There certainly are merits of having a strong relationship with just one bank. However, there are more advantages to diversifying your relationships amongst a few lenders rather than just one.

Any financial planner worth their weight will always talk about “a diversified investment portfolio.” The idea here is that you spread your investments around to maximize return and minimize risk.  If one investment tanks, then you’ve got several other investments still chugging along making you money. In other words, all of your eggs are not put in one basket. The same philosophy can (and should) be applied to lending relationships.

Working with more than one lender gives you leverage, or a bargaining chip.  If you have your personal banking with “lender A” and your mortgage with “lender B”, both entities will see you as a client they’d like to do more business with.  You already have a good relationship with two lenders and will have access to all of both lender’s products. This gives you a distinct advantage in selecting the best products for your personal needs. It also puts you in the position to get two lenders competing for your business. If you only deal with one lender, you could be painting yourself in a corner by limiting your choices. While it may seem that your bank has your best interests in mind, it’s my advice to take the bull the horns and make sure that you keep your options open with the lending community. Only you truly have your best interest in mind.

TD Bank makes a move to keep more mortgage clients

It has been recently announced that as of October 18th, 2010, TD Bank will being registering mortgages as a collateral charge rather than a standard mortgage charge. TD will also begin allowing clients to register this charge at 125% the value of their property. TD says this will benefit clients when they need access equity in their home or make changes to the mortgage because they won’t have to incur legal fees to break the contract.

What does this mean to the consumer?

When a mortgage is registered as a collateral charge, it must be paid out in full before it can be discharged (or, in other words, allowed to be moved to another lender where the client can benefit from lower rates or better products). That means that at the end of the mortgage term, It will now cost a client legal fees to have the collateral mortgage paid out before they can move their mortgage to the lender of their choice. Moreover, by registering the charge at up to 125% of the value of the property, it dangerously leaves the gate open to people getting over their head in debt; if you are in debt above 90% of the value of your home, you’re in a bad spot, let alone 125%.

TD is essentially trying to keep mortgage clients from moving on to other lenders at the end of the term with this new policy. Incurring legal fees in the $700-$1,000 range would discourage some TD clients from leaving the bank in search of a better rate. They would instead enter a new term with TD at whatever rate TD felt like giving them.

Here’s where working with a licensed mortgage planner comes in handy. If you did need to pay $700-$1,000 to get out of a TD mortgage at the end of the term, I could run the numbers to show you what sort of interest rate you’d need to “break even” over the course of the term, compared to the rate you’d be offered at renewal. More importantly, I could let you know which lenders register their mortgages as collateral charges and which lenders don’t.

For more information on this topic, please click here for a recent Globe and Mail article.

Refinancing: How it works

Refinancing is the act of getting out of one mortgage and into another mortgage. It normally involves paying a penalty to the lender if the mortgage term is being broken before it’s expiry date.  So why would someone want to do this?

Better rates. Interest rates change all the time. For example, if you got into five year fixed mortgage two years ago, chances are the rate was around 5.50%. Today, a five year fixed mortgage is around 3.50%. Depending on the size of the penalty from the original lender, it may make sense to pay the penalty and go with the new lender at the much lower rate.

Debt consolidation. Consumer debt consistently has a higher rate of interest than mortgage debt. Some major credit cards charge upwards of 20% interest on the balance. It makes sense to consolidate as much high-interest debt as possible into low interest debt. Refinancing is sometimes the best thing to do in this situation. I did a refinance for a client last week where they not only got a lower rate for the mortgage, they also paid off $40,000 in high interest debt and in so doing have freed up close to $1,300/month in cash that was otherwise going towards making minimum payments on credit cards.

Investment. If you have enough equity in your home, you may want to tap into that equity for the purpose of making investments. Essentially, you are borrowing money out of the value of the home to put into other activities that will be finacially beneficial, such as an RRSP loan or a non-registered portfolio. If you are thinking about doing this, I definitely recommend speaking to me first so I can put you in touch with a reputable financial planner who will show you how to invest safely and responsibly within your comfort level.

Here’s a play-by-play of a typical refinance scenario. (I’ll use the one I did last week as an example.)

1) Client has $40,000+ in high interest debt and owns a single detached home in the Greater Vancouver area worth approximately $630,000.

2) The current mortgage balance was about $400,000, and the client needed funds to pay off the debt as well as funds to invest back into his company.

3) In Canada, since you can refinance up to 90% of the value of the home, this made the maximum loan amount to be $567,000 after an appraisal confirmed the property’s market value.

4) The lender we chose issued a mortgage commitment for $525,000. With that money, the old mortgage was to be be paid off, all of the high interest debt was to be paid off, and the remainder was to go towards the client’s company. The new mortgage funds of $525,000 were then sent to the client’s lawyer to complete all of the transactions.

If you think you might benefit from refinancing your existing mortgage, drop me a line and I’ll take a look at your situation.

Need more money for your down payment?

As a first-time buyer, one of the hardest things to do is save for a down payment. The minimum amount that you need is 5% of the total price. For a condo in Vancouver priced at around $350,000,  that means you need $17,500. You also need to show the ability to pay closing costs, which is calculated at 1.5% of the total price, or in this example $5,250. (Closing costs are things like legal fees, interest adjustments and property tax adjustments.)  It adds up.

There are a couple of mortgage products out there that will give you cash back to help with your mortgage, but one in particular that stands out from the rest. Here’s how it works.

You will get 3% of the purchase price, tax free, to go towards the down payment or closing costs of your property. Using the $350,000 example, that gives you $10,500. That leaves you with the task of coming up with $7,000 yourself, which is a lot more manageable if you’re serious about saving for your own home.

So, they give you some extra money, but as you may have guessed, it is not for free. An extra 1.00% is added to the 5 year rate in exchange for this upfront money that is helping you get into the market. Luckily, right now 5 year rates are very low, so even with the additional 1.00%, you’d still only be paying about 4.59% or so. (This time two years ago, a five year rate was about 5.50% just to give you some perspective on the value.)

So how much would payments be? Based on 5% down with a rate of 4.59% on a 35 year amortization, you’d be looking at a payment just shy of $1600.00 a month, which is definitely reasonable for a young working couple or a single professional.

A few more things:

1) you have to have descent credit, meaning a beacon score of 650 or more.

2) if you break the mortgage before the end of the term, you need to give some of the money back.

3) You can only go with a fixed rate product, variable is not an option.

4) You can only have one cash-back offer per term, so if you’re a couple, you can’t have one each. (I know I would have gotten that question if I didn’t say it first.)

All in all, there’s a good deal of value in this mortgage product, especially for first-time buyers who are having a tough time saving that extra little bit for their down payment.

Need more info? Email me at wright@mortgagegrp.com.

Is the lowest rate the only thing to think about?

Quite honestly……..no.

In many cases, your personal situation will dictate what lenders you have the option of going with.

What’s your situation?

Here’s a list of 10 questions to ask yourself:

1) Is my beacon score high enough? (Don’t know? It’s time to check then!)

2) How do I make my income…am I salaried or self-employed?

3) How much down payment do I have?

4) How much debt do I carry?

5) What type of property am I looking for? What type of land is it built on? Where is it located?

6) Do I plan on making pre-payments to my mortgage to lower my overall cost of borrowing?

7) Am I planning on moving or selling my home anytime soon?

8) What sort of risk tolerance do I have for interest rate fluctuation? Or, do I even make enough to qualify for a variable rate mortgage?

9) Do I have an unsecured line of credit?

10) Do I own any other properties?

Once you’ve taken a look at these things, we will have a much better idea of what lender is the right one for you. At that point, let’s talk rate.

An example of the new mortgage rules in action

If you wanted a variable rate mortgage today, you would be qualified on a rate of 6.25%. (this is the case for high-ratio mortgages, meaning less than 20% for a down payment, although some lenders are extending this rule to conventional mortgages as well where there’s more than a 20% down payment. Makes me wonder….)

Here’s a scenario that a client of mine just went through. He was attracted to a variable rate mortgage offering Prime -0.50% (1.75%).  This guy is a full-time salaried employee in a management position with excellent credit….a wet dream for the risk tolerance guys at the bank. He was looking for a mortgage of about $390,000 (CMHC insurance included) to finance a nice one bedroom condo in Vancouver. He had a good-sized 10% down payment. The agreed sale price was $419,000.

On today’s best variable rate, the monthly payment would be $1,230. That’s a very affordable payment for a client who has proven for years that he can a)make good money and b) handle debt responsibly.

However……

Based on the qualifying rate of 6.25%, the monthly payment would be $2,267. Yuck.

Because this payment is so high, the debt-servicing ratios were blown out of the water, making it impossible for my client to get a variable rate mortgage. (debt-servicing ratios are simply formulas banks use to determine how much they will lend you based on how much you make compared to how much you owe.) Instead, my client was forced into a fixed rate mortgage where he’s paying closer to $1,800/month. His rate is still as low as a fixed rate goes these days, but his option to choose his own level of risk tolerance was taken from him.

Amy and Andy’s First Time Home Buyer’s Workshop

Interested in buying a home or finding out more about the home buying process?

On April 22nd, join industry professionals Amy Rozier and Andrew Wright for an informative overview of what to expect when purchasing real estate.

You’ll learn tips, tricks and strategies that will de-mystify the process of buying your first home.

Attendance is free and everyone is welcome to join us. Refreshments to follow.

The event will be held at The Red Square Tapas Lounge
1216 Granville Street. (Granville between Drake and Davie).

**Draw Prize** Our sponsors Lucious Salon and Pulse Fitness have contributed two great prizes that will be given away at the event. All attendees will be entered into a draw for:

-A complimentary cut and 20% off a colour treatment at Lucious Salon, 102-1120 Hamilton Street in Yaletown.

-A consultation and two personal training sessions with Marsha Regis of Pulse Fitness.

Please RSVP attendance to homes@amyrozier.com or wright@mortgagegrp.com.