Month: April 2017
You’re in the market for a home. First thing you do is get your financing in order. No sense shopping around for a place if you can’t qualify for it right? Plus, you want to have an idea of how much of a home you can get. You meet with your mortgage broker who examines your paperwork and provides you with your prequalification. With the amount you can qualify for, you are on the lookout for a cute little condo. With the help of your Realtor you find a place quickly, your DREAM home! You now have a contract of purchase and sale in hand, so the only thing remaining is to confirm the financing.
You might think that is a given since you already got prequalified. However there are things that could disqualify your financing. As I’ve mentioned before, the property is a big part of the mortgage qualifying scenario. And with a strata property, there are even more things that are considered as opposed to a detached property. Let’s delve into those things a little further.
Lenders want to ensure that the property is marketable, which means that in the case they have to sell it, there is nothing, or little, that would hinder someone from buying it. So to start, the top 3 rules of real estate apply which are: Location, Location and Location. The location of the place you buy is very important to the lender. Is it in a remote area? If so, you might have a tougher time getting financing for it. The more remote the area, the less people that are interested in buying the property. Therefore it would be tough for the lender to sell if needed.
They also want information on the building’s condition. One of the documents that can be requested and provides the desired information is the depreciation report. This report is drawn-up by a 3rd party company and gives details on the condition of the property. It will describe things like the plumbing or the balcony and state whether it is fine, needs repair, and/or when in the future it will need repair. It also discusses costs for each item that are needed now, or in the future to fix or replace them. If the reports states that there is a major cost that is required in the near future, chances are the lender would not provide financing.
Some much less detailed documents that are requested are the strata minutes. Usually about 6 months worth of minutes are reviewed by the lender. In the minutes will be issues pertaining to the building. They will look to see if there are any negative discussions in them like a leak in the roof, or balconies that need replacement. Again, if anything with huge dollar signs are evident, then financing is not likely.
Another source of information is the property disclosure statement. This document is signed by the seller and states their knowledge of different aspects of the building and unit. If there are changes to the unit that they are aware of, details of those changes are required here. As with the previously discussed documents, if anything is seen here that reflects negatively on the property, you may have to look for another property to buy.
“Well if the location is good and the property is in excellent condition we must be fine for financing, right?” Maybe not. If there are age restrictions in the complex, that too can be an issue for you obtaining financing. If it’s a 55+ building or 19+ building your chances of financing dwindle dramatically. With those designations comes a limited number of people that can buy the property. And we now know how lenders feel about restrictions on properties…Not good. Is it a self managed strata? If so, then there’s another strike against your chances of financing. There are some buildings that don’t have a strata management company running the complex but are self managed. BC has around 275 Brokerages and 1,200 property managers licenced to look after a strata property. When a building is self managed, and without the security of licenced individuals taking care of the property, that leaves the lenders uncertain of the capabilities of those in charge of running the strata. And when there’s uncertainty, there is a small chance of money being given for your purchase.
So the next time you’re out shopping for your new home with your pre-qualification in hand, remember who holds the trump card. The property has the final say.
If you are a sports fan, (like I am) then you know the penalties associated with each sport. In football, if you tackle a player by grabbing their facemask, you know that there is a 15 yard penalty. In hockey, if you slash a player’s arm with your stick, you know that there is a 2 minute penalty for slashing. In soccer, if you trip a player, you know that there is a free kick or penalty shot awarded to the opponent. But when it comes to mortgages, do you know the penalties associated with breaking your mortgage? Are they all the same? Do all referees officiate the same? As you might have guessed, the answer to the last two questions is no.
All mortgage penalties are not the same and each lender does not calculate them the same way. There can be vast differences between penalties and I’ll share them with you here. First, I’ll start by stating what “breaking” the mortgage means. So to incur a penalty a borrower has to break the mortgage; or in other words they are getting out of the mortgage contract. Ways to do that are by: 1) paying off the mortgage in full, 2) refinancing your mortgage or 3) selling your home to move into another place. Any of those actions will result in a mortgage penalty.
So how much are we talking here? Well that depends on the lender you’re with and the type of rate you have; fixed or variable. The variable rate is the easy one to decipher since it is the same across the board. If you have a variable rate mortgage, the penalty is 3 months of interest. Plain and simple. End of story. Whatever balance is remaining on your mortgage you calculate 3 months of interest payment. Every lender does this with the variable rate. Banks, Credit Unions, Monolines, they are all the same. Where they differ is with fixed rate penalties. And oh what a difference it can be.
They all use what is call the Interest Rate Differential (IRD) to calculate the penalty for a fixed rate mortgage. Technically, it is the higher of the IRD or 3 months interest, but rest assured; with Banks and Credit Unions it will undoubtedly be the IRD. Let me describe what the IRD entails. It is the difference in interest that is potentially lost by the lender when you break the mortgage. The majority will use a posted rate, and compare that to the rate available for the remaining term.
Banks and Credit Unions tend to calculate their fixed rate penalties in a similar way. They will use an inflated posted rate when calculating IRD. Let me give you an example. Say you had an interest rate of 2.79%, five year fixed term when you bought last year. You earned a promotion at work but your new positon is in another province, so you need to move. Your mortgage wasn’t portable, so you have to break your mortgage contract and get a new mortgage. With Banks and Credit Unions, even though your rate was 2.79%, the posted rate at the time would be higher, like say 4.84%. Why? For this calculation.
Let’s say an available rate for the remaining term, (4 years) would currently be 2.64%. The difference between the available rate and the posted rate, is used to calculate the interest rate difference. That rate (2.2% in this example) is used in calculating the interest lost for the remainder of the term. Depending on when you break the mortgage, it can be quite a high number. Hearing $30,000 needs to be forked over is not far fetched when it comes to an IRD penalty. Which means there can be a painful bill from the lender waiting for you when you sell your place.
Thankfully Monolines don’t calculate IRD the same way. “What is a Monoline lender,” you might ask? Well a Monoline is a lender that only lends money for mortgages. They don’t hold your money in chequing or savings accounts. They don’t offer TFSA’s or mutual funds. They are strictly in the mortgage lending business, hence the term “mono” line. They are available through mortgage brokers and are a huge part of the industry. They fund billions in mortgages and offer a great alternative to the major banks. One of their major assets, is the way they calculate their IRD.
Instead of using an inflated posted rate, Monolines posted rates are much closer, if not exactly the same, as the best available rate they have. In doing that, their IRD penalties are way lower than the banks. How much lower? Well its safe to say it’s significant. Like a family of 4 trip to Europe significant! Because of the large discrepancy, it’s definitely important to consider carefully which lender you use if you want a fixed rate mortgage. There are obviously other factors to consider, however the possible penalty should be near the top.
So there you have it. Mortgage penalties 101. An eye opener I’m sure for some, who may have thought all mortgages are the same. Some good food for thought for those who are out hunting for a mortgage. Be aware of the penalties involved, or they could cost you.
Interest rates can be confusing. On one hand, you hear that the Bank of Canada isn’t going to raise rates for a while, so no need to worry. On the other hand, you hear with the “Trump Affect” and the US Feds raising their rates and planning more rate increases, that rates are on the rise. What do you believe? Which is more accurate? Well, let me try and bring some clarity to this issue.
The first thing to realize is that fixed rates and variable rates are different. “Well that’s quite obvious,” you might say. One is fixed for the entire term and the other can change depending on some factors. That being correct, there is more to it than just that. You see, when rate increases and decreases are being talked about, you have to know that only one of them is being discussed. An increase or decrease in variable rates does not have an affect on fixed rates. And the opposite is true as well. If fixed rates were to rise, it would have no affect on the variable rate.
Let me delve further into each of them. The variable rate is influenced by the Bank of Canada. Eight times a year they announce what they are setting what is called their “overnight rate” to. Off of that rate, the lenders set their prime rate. Most lenders have the same prime rate but it’s not mandatory that they do. The difference in rates comes from the “discount” that each lender gives on their prime rate. Let me give an example. Currently, the Bank of Canada Overnight Rate is at 0.5%. Most lenders have their prime rate set at 2.70%. So if the lender discount was Prime-50%, then the variable rate would be 2.20%.
The Bank of Canada usually moves a quarter percent when they change their rate. Therefore if they were to change the rate higher of lower by that quarter percent, the lenders in theory would change by the same amount. However seeing that lenders love their profits they don’t move exactly the same as the Bank of Canada. When the rate was decreased last in July of 2015, the lenders didn’t pass along the full discount to consumers. They only decreased their prime rates by 15%, keeping the rest for themselves. But if there were an increase in the rate by the government, I’m sure the lenders would follow suit with an equal quarter point increase in their rates. “It’s all about the Benjamin’s,” as the saying goes, or in our case here in Canada, “It’s all about the Borden’s!”
Now let us discuss the fixed rate. The fixed rate is married to the bond market. As bond yields(the cost of purchasing a bond) increase, an interest rate increase coincides with it. Now there is not a direct correlation between the two. They don’t move up and down at the exact same amounts. However they do move in conjunction with each other. As with the Bank of Canada rate, lenders don’t always keep the same spread between their fixed rates and the bond yield. That being said, rest assured, if there is steady movement either way with the bond yield, fixed rates will move in sequence.
How does the “Trump Affect” factor into rates? Well his monetary policy, or intended policy, is what is driving the talk of rate increases. You see, his plan to increase government spending and reduce taxes is leading to a potential increase to inflation. If inflation goes up, then bonds value goes down since they have an inverse relationship. To defuse the affect of inflation the government could lower interest rates. However the US Federal Reserve has already raised their rate and are believed to be planning two more rate hikes this year. Being so close with the US physically and in terms of trading and markets, what happens there will ultimately affect our fixed rates as well. With our economy in the state that it’s in, an increase to inflation would not be good. At this point, our government is far from thinking of a rate increase and is therefore keeping a tight leash on inflation. Despite that, there will still be some bump to our fixed rates thanks to our friends south of the boarder.
So now that you are armed with all of this information you may inquire, “What should I go with? A fixed rate or a variable rate?” What will save me the most money? What is the best rate for my situation? Well the answer….will have to come in another blog.