Reno Financing

General Pam Pikkert 28 Mar

Renovation Financing

 

                There comes a time when things just start to wear out and you have to replace them.  Bigger ticket items like a new kitchen or new windows can be at the top of the list but finding the funds to do so can be hard when your monthly budget is so eaten up by your other bills.  This week we are going to look at how you can put together the financing you need to make your home reno dreams come true.

  1. The first option you have is always a visit to your local bank to obtain a regular old loan.  The plus side to this is the loan you take will likely be done within a 5 year time frame as this will be an installment loan.  The downside is that if you borrow $40,000 you could be looking at a payment of $800 a month on top of your regular bills which could be hard to adapt to.
  2. The second option is an unsecured Line of Credit.  These are available from your bank as well.  The upside here is that the minimum payment is often only 1% of the outstanding balance which can be easier to stomach monthly.  The downside is that if you make the interest only payments you will owe the balance indefinitely and pay an awful lot of interest.
  3. The third option is a refinance plus improvements mortgage.  This mortgage works like this.
  • You get quotes for all the work you want to have done.  These need to be for things which will stay with the home so new appliances do not fall within the guidelines
  • You call your existing lender to find out your mortgage penalty as we will be breaking that contract to put the new mortgage in place
  • We gather ALL the necessary documents to complete the mortgage application.  Please keep in mind the lending landscape has changed in Canada and that list of documents is much longer than it used to be.
  • An appraisal is ordered to determine the as is and the as is improved value of the home.  The quotes for all the work have to be submitted to the appraiser at the time this is ordered to give the correct valuation.  We cannot go higher than 80% of the improved value for mortgage financing as per the rule changes a couple of years ago.
  • The day of funding the existing mortgage is paid out and the funds for the renovations are held in trust at the lawyer’s office until an appraiser visits the property to confirm the work is complete.

The upside to this product is that your monthly budget is not affected very much at all as the loan is taken over a longer time frame.  The downside is that you will need to have access to some funds to bridge the gap between when you start the renos and when the funds are released from the lawyer.  There are also the additional costs of legal, appraisal, title insurance and a mortgage penalty. 

The other choice you will have to make at this time is which mortgage product you want.  You basically have 3 options.

  • A regular fixed rate mortgage where the term and payment are set.
  • A variable rate mortgage where you will be given a rate which will be set as an ongoing prime less the discount for the term of the mortgage.  A variable mortgage does have a penalty if it is broken but it is only 3 months interest making it an attractive option
  • A Home Equity Line of Credit.  There is a misconception out there that a HELOC is not a mortgage. This is not all accurate though.  A HELOC is a mortgage like any other and has to be registered through a lawyer.   We are also only able to go to 65% of a property’s value with this type of a loan though can pair it with a fixed or variable rate to go all the way to 80%. 

So there you have it.  Renovation financing options for your consideration.  As always a qualified mortgage professional is your first stop to explore all of the above in detail.

 

Did Your Lender Really Mean No?

General Pam Pikkert 21 Mar

Did Your Lender Really Mean No?

 

                The truth of the matter is that the mortgage lending landscape has changed drastically in the last few years.  What was once a straight forward matter is now often a trudge through an unexpected maze of hoops.   This week we are going to take a look at why that is and how you can get to yes ASAP.

 The first part of the equation is the government.   The federal government guarantees mortgages in Canada through the mortgage default insurers. Often even those with more than 20% down, you just don’t pay the premium then.  This means they are tying the entire country’s fiscal wellbeing to the housing market.  If too many bad loans are given there would be pressure on the government to account for the lending practices which got us to that precarious position.  We have seen a change in the guidelines which lenders are required to use because of this.   A few of the major changes:

  • Maximum amortization decreased from 40 years to 25
  • Maximum Home Equity Line of Credit is 65% of a property’s value
  • A repayment of 3% must be used for all outstanding credit card and line of credit balances
  • Anyone choosing less than a 5 year term must qualify at the bank of Canada posted rate to ensure they can afford the home upon mortgage renewal
  • Rental properties require at least 20% down
  • Maximum refinance amount is 80% of the property’s value
  • Self-employed individuals must verify the income

The second part of the equation is the current economic situation here in Alberta.  It is no surprise to any of us that foreclosures and late payments are on the rise.   What that means for mortgage lending is that the lenders and the mortgage insurers are examining every file much more closely.  They want to see that we all have some extra funds in the bank to cover a slowdown or other life event.  They also want to see some very strong credit management.  Gone are the days of lenders looking the other way on credit issues.  These days they want to know what happened and your plan to ensure that it will not happen again.

So what if you have decent credit and some savings and your lender still says no, what should you do then?  The first thing to keep in mind is that each institution has very different guidelines given to them by shareholders and investors and other behind the scenes people.  Just because your application is not a fit with the first lender does not mean the next will not proceed. 

You may need to consider an alternative lender if it comes right down to it.  It is quite possible that your situation puts you in a position where this can be the best and maybe even the only choice.

For example.

Say you are self-employed and choose to claim little income.  Your reasons for this could be to keep your company strong or your personal taxes low.  The problem here is that we no longer have a whole bunch of lenders willing to accept income without verification of it via your tax returns.

Or say you are a doctor new to Canada, your income may be hard to prove to the satisfaction of the mainstream lenders.

Or if you have blemished or damaged credit which leaves the lenders thinking you are too large a risk.

There are a myriad of situations which may put you outside the ‘normal’ guidelines.  In any of these cases it is important to note that there are many alternate lenders who may suit you perfectly.

Things to keep in mind here:

  • These lenders will require you to have some skin in the game.  You will need at least 15% to put down depending on your credit score, income, and the location of the property.
  • The rates will be higher given the increased risk to the lender for lending outside the norm.
  • You may be facing lender fees with certain lenders though it can still make sense to help payout high interest debts or avoid mortgage default fees

Talk to a well-qualified mortgage professional today to see if the no you were given can be turned into a yes.

Jingle Mail Debunked

General Pam Pikkert 11 Mar

Jingle Mail Debunked

                There have been many stories on the news in the last little bit about a surge in jingle mail.  What is jingle mail you ask?  It is when a homeowner is no longer able to make their mortgage payments due to a health issue, job loss or other life event so they choose to mail the keys to their mortgage lender thereby surrendering their home.  The bank knows they have the house to do with what they will and the clients carry on unencumbered to deal with their life.  The problem is that this is not how it works.  At all.  You cannot step away from your mortgage obligations and the consequences of not paying the mortgage in this way.  I do not care what Bob at the coffee shop told you his brother did, it is simply not true.  Let’s look at this myth and debunk it.

                So what can you expect exactly? If you stop paying your mortgage, for whatever reason, the bank and the mortgage insurers have legal recourse to come after you.  I am not a lawyer and so I will not get into the particulars but you need to know that you are liable for the legal fees incurred by the lender to foreclose upon the property, any shortfall claim from the lender, the Realtor fees to sell the home, and the loss on the mortgage.  These costs add up very quickly and are into the tens of thousands before you know it.  They can take legal action against you even after the house has been sold to a new person.  Yes, you are responsible for them and you agreed to be so in the mortgage documents you have signed.

                Another point to consider is this, once you have been foreclosed upon, the chances of you getting another mortgage are next to 0.  The foreclosure will be reported on your credit report, to the bank and to the mortgage insurer if you had purchased the home with less than 20% down.    Lenders are not likely to lend you the funds needed to purchase when you were clearly unable to meet your obligations the first time.

                So what should you do when life has left you unable to make your mortgage payment? Talk to the lender BEFORE things get out of hand to see if you can come to an agreement.  If you don’t get anywhere that route, call your mortgage default mortgage insurance provider directly.  Remember that big insurance premium which was added to your mortgage?  It can come in very handy in this situation.  Those companies do not want to see you mail your keys in as it is less expensive to help you now than it is to payout on a claim later.  The 3 companies who provide mortgage default insurance in Canada are CMHC, Genworth and Canada Guaranty.  Each has their own policy for these situations, as do the lenders, but they can help in a variety of ways.

  1. Capitalized Arrears- occurs when the money that was past due on your mortgage, along with any interest and penalties you have acquired, is just tacked on to the mortgage balance that you owe.
  2. Increased Amortization- The overall length of the mortgage can be stretched which will reduce the monthly payments.
  3. Partial or shared payment Plan – They may reduce your costs to interest only payments or a reduction to an interest plus a small amount to the principle.
  4. Deferred Payments – Your payments can be deferred up to 6 months.
  5. Promissory Note- The insurer can actually lend you the funds to catch up, often at 0% interest.
  6. Assisted Shortfall Sale – If the worst comes to pass and there is no way for you to keep the home, the insurer can assist in a shortfall sale.  The benefit of this is that it leaves you in position that once you are back on your feet, you can be approved for another mortgage by the lenders AND the insurers.

It is very important to note that each lender and insurer are different in their policies so you may not be able to access all of these solutions.  If you put more than 20% down you are not likely to call upon the assistance of the default insurance provider.

Call your lender, your mortgage specialist and you default insurance provider as soon as you think you may be in trouble.  There are also insurance companies out there offering job loss and disability insurance so consider those options while you are healthy and employed.

 

That’s all for this week.  Until next time.

Do You Need a Ferrari Level Mortgage?

General Pam Pikkert 7 Mar

Do You Need a Ferrari Level Mortgage?

We all want the best. For instance, a Ferrari is way better than a minivan. It’s faster, sleeker and much more prestigious.  But what if you have 3 children and drive to hockey every Saturday and need the extra space?  All of a sudden that minivan is looking much more appealing.  And when you factor in the higher costs associated with maintaining every single aspect of that Ferrari?  That minivan is downright shiny.

This theory applies to your mortgage too.  I’ll admit there is something reassuring about a brick and mortar building which you can visit up to 7 days a week and be greeted by a friendly clerk who helps you do whatever it is you need to do.   But consider for a moment if the value you placed on that building were misguided. That the prestige many of us place on being with a major bank for our mortgage is not quite what we thought. What if in making the choice to deal with your bank you doomed yourself to higher costs and hidden clauses?  All of a sudden your Ferrari of a bank seems less appealing.

Let’s look at a few of the unexpected costs you can be hit with.
1. Payout penalties- there is no standard on how lenders charge this penalty if you break the mortgage.  Your mortgage is a contract and you will have to pay a fee to get out early.  I have seen these range from $3500 to $18,000 on the same exact mortgage with the only difference the lending institution.  Life happens and you may end up needing out early due to a marital break down, a job loss or other life event.  I would also caution that some of the crazy low mortgage rates out there come with an additional penalty.  You could be charged 2.75% of the principle PLUS the regular penalty.
2. Prepayment privileges- Did you know that some lenders do not apply your extra payments right away?  It’s very true.  They hold the funds in a separate account where they generate and keep the interest gains while you miss out on the full benefit you are striving for.
3. Interest compounding periods- Did you also know that some lenders compound interest on a Home Equity Line of Credit monthly?   Einstein identified compound interest as the 8th wonder of the world and stated that those who know how to use it properly will benefit greatly.  This monthly calculation difference over that of a semi-annual will cost you more in the long run.
4. Collateral mortgages. – A collateral mortgage is where the lender registers on the title that you owe them more than you actually do.  The benefit is that you can borrow additional funds down the road if you so choose without having to visit a lawyer as there is no change to the title of the property.  The downside is that these mortgages are much harder to switch out a new lender at renewal which could leave you with a higher than market best rate.  Your other borrowing such as for a vehicle or credit cards can now be tied to your mortgage through the nasty fine print.  Depending on the lender you may be required to pay out all of the borrowing associated with the mortgage if you sell.  This can leave you in a poor position when you go to buy again with less than you thought as a down payment.
5. Porting Policies. – Some of the banks have strange policies.  For example, one has a policy where you keep the current mortgage as is and any new funds are taken in a new term at a new rate with a new renewal.  That leaves you never able to move your mortgage to a new lender without incurring some penalty.  You are stuck potentially not being able to get the best rates which costs you greatly.

All I’m saying is this.  Ask questions before you sign.  Lots of questions. Know if you are opting for a Ferrari when what you really need is the flexibility, extra leg room and lower costs of the minivan.  Have a great week.