The Language of Mortgages

General Pam Pikkert 31 Jul

 

Applying for a mortgage can be very stressful to say the least.  It seems as though your hopes and dreams are held hostage to rules set by people you don’t know and your paperwork adjudicated by seemingly unreasonable nameless faces.  To make matters worse you are hit with a whole bunch of new words which hold all kinds of significance.  So let’s get rid of that piece of worry and look at the common words and phrases you will be hit with.

Mortgage Qualifying Rate – Last year a change was made to how mortgages are qualified.   The bank have to use a rate of 4.84% for qualification purposes.  Interest rates are very low and we know they will climb.  The intent is to ensure Canadians are able to handle that increase.

High Ratio – Mortgages which are loaned at higher that 80% of the property’s value.

Conventional – Mortgages at less than 80% of the property’s value.

Affordability Ratios – When all your existing debts, the proposed mortgage, property taxes and heating costs are calculated against your income, percentages are generated.  They cannot be above certain levels.

Mortgage Default Insurance – If you are purchasing as home with less than 20% down you will have to pay this to CMHC, Genworth or CG.  It is a guarantee to the mortgage lender that if you default that these companies will make the mortgage lender whole by paying out the costs not covered through the sale of the home.

Term – You can choose anything from a 6 month to a 10 year mortgage.  Rates will differ greatly.  At the end of said term you will renegotiate with your current lender or move to a new bank.

Amortization – This is the term used for how long you take the mortgage all together.  In most cases the maximum is 25 years but some conventional mortgages can go up to 30.

Title Insurance – Another type of insurance required by most banks.  If there is a defect such as a garage being situated incorrectly, the title insurance company will attempt to get the city to allow it or in the worst case, cover the costs associated to make the necessary changes.

Fixed Rate – A mortgage rate which is set for the entire term of the mortgage.

Variable Rate – This rate is set as prime plus/minus for the term of the mortgage.  It can fluctuate as the Bank of Canada makes changes to the prime lending rate.

Closed – Most mortgages are closed which means if you break the contract you will pay a penalty.  This applies to fixed and variable

Open – This mortgage is completely open for prepayment without penalty.

Property Tax adjustment – If the person you are buying from has prepaid the property taxes you will be required to pay them back for this amount.  This is collected from you at the lawyer’s office.

Interest Adjustment Date – If you are taking possession of your home any day other than the first of the month you will have to pay the interest portion to the lender which is calculated per day starting on the day of possession through to your first payment.   This can be an extra payment taken from your account or collected at the lawyer’s office

Condition of Financing Date – The day you have to provide the all clear to the seller – This should never be done before you have assurance from the bank that they are satisfied.  It is imperative that you make no material changes to your financial picture from this date through funding.  You approval can be cancelled if you do leaving you in breach of contract.

Closing Date – The date the mortgage is set to fund.

Prepayment Penalty- If you break a closed mortgage there will be a penalty. Contact your mortgage provider to get the exact amount.

Prepayment Privilege – You can prepay your mortgage, usually up 10-20% of the principle amount each year.

Porting – You can take your mortgage with you to a new property to avoid penalties and preserve your rate.  You will have to fully qualify again.

 

So there you have it, a plethora of mortgage terms so that you can decipher the strange new world you will find yourself in during the process.  Until next time!

Are you Financially Ready for Homeownership?

General Pam Pikkert 24 Jul



Canadians are firm believers in homeownership.  We see the long term benefits of paying down our own mortgage as compared to a landlords.  Our homes become our largest assets and often factor into retirement planning. Here are a series of the extra costs you should consider before writing that offer.

Down Payment and Closing costs: The minimum down payment you have to have is 5%.  In the case of a $300,000 home that is $15,000.  If you are purchasing a home over $500,000 the down payment minimum increases.   On top of that you have to have 1.5% of the purchase price for closing costs.  In this case that is an additional $4500.  This will cover things like the legal fees, title insurance, tax adjustment and all the other expenses which you will incur just to get the mortgage to fund.  Banks these days really like to see some additional savings in case of anything adverse.  Ideally you will have 10% of the purchase price in your account to demonstrate you are indeed ready.

Insurance: One cost few people account for is life, disability, critical illness and job loss insurance.
Life: There is a 100% chance that we are all going to die at some point.  You need to make sure your loved ones are protected for this eventuality.
Disability: Disability is the number one reason of foreclosure in Canada so again you owe it to yourself to ensure your home is protected in case of this.
Critical Illness: We have an amazing health care system here but even so there are significant costs if you are diagnosed with a life threatening disease.    Sadly we all know too many people who have been laid low by serious illness to allow ourselves to naively assume it will never happen to us.  Critical illness insurance covers you in case of a life threatening illness.
Job Loss: Albertans more than most know how quickly the economy can turn and we can unexpectedly face a job loss.  There is now an insurance policy to protect you against that too.

Family coverage: You may want to consider insuring your children.   A serious illness in a child can drop your income by half as one person ends up leaving work to take care of them.  Of course there are the extra expenses while treatment is sought.  In the case of the unimaginable, insurance allows you to cover costs and take some time from work.  Even if your spouse does not work, having coverage for them should be considered.  If you all of a sudden have to cover costs of child care your savings can dry up quickly

I am often told that people have sufficient coverage through employer but I respectfully challenge this.  Most employers cover only one year’s salary and given how many Albertans lost their jobs in the last downturn this is clearly not a failsafe system.  If you have a change in your health it can be very difficult to get coverage down the line.  I am a big fan of third party insurance providers.  Ones which are tied neither to your mortgage lender nor your employer.

Home upkeep and other monthly expenses: The other costs you have to be ready for is the upkeep of said home.  Are your able to handle the upkeep day to day or the larger expenses like a new furnace or hot water heater?    I can assure you that when it is minus 35 you are going to need that furnace to work.    You will now be responsible for property taxes and home insurance.  Budget them in ahead of time.

Increase to mortgage payments: Another important consideration is the mortgage itself.  At the end of the mortgage term you will sign into a new term.  The rate may be considerably higher which in turn increase your mortgage payments.  Look carefully at your budget and do some forecasting to make sure you will be able to afford the mortgage payments if rates increase.

Some serious points of consideration for the smart Canadian here today.  A home is the biggest asset and a mortgage the largest debt most of us will take on.  Let’s make sure we are ready because we all know too many people life hit unexpectedly and wouldn’t you rather be ready than regretful?

Time to Be Heard Canada!

General Pam Pikkert 10 Jul

I met with a client recently who wanted to get a pre-approval before he sold his home.  His neighbor is a very grouchy man who causes my client and his family a lot of stress.  He just wanted to sell his home and move into a new one away from this situation.  I had to tell him no and explain that although he has good credit and a very stable job he does not qualify under the new rules.  He was saddened to hear that and is now faced with a decision of should he stay and put up with the situation or should he rent out his home and then he himself rent somewhere else.                   (Thank you, sir, for allowing your story to be shared)

What happened to cause this??  Late last year the federal government made another round of changes to the mortgage rules.  This was after we have already seen numerous previous rule changes over the last 7 years.   They dramatically increased the qualification rate with the intention that people be able to handle a higher mortgage payment when rates start to rise.   They were also attempting to cool the hot real estate markets in Vancouver and BC.  Additionally, they changed which properties can be insured which has meant that people with more than 20% equity in their homes have fewer choices of mortgage lenders and/or higher rates. Since that time, they have also increased the mortgage default insurance premium and tightened up lending guidelines.  Before the dust has settled on those changes we have been told that further changes are under consideration.

Here is what we need from you.  If you or someone you know have been adversely affected by the mortgage rule changes we need you to speak up.  Let’s take our freedom of speech for a spin and let our MP’s know of how specific Canadians are being negatively impacted.  TELLYOURMP.CA is the site set up that you can easily visit and share your story.  Maybe you were turned down or unable to buy a home large enough or in a safe community for your family.  Maybe a job loss or divorce means you are looking to purchase on a single income.  Whatever the case, please speak up.  Visit this website, write a letter, call your MP.

They are doing their best to keep the Canadian economy as strong as it can be but we are seeing a lot of unintentional negative consequences and good Canadians in ALL of Canada are being adversely affected.

TELLYOURMP.CA  It will not take you long and it goes directly to your MP.   We your mortgage industry, the banks and mortgage lenders are on record but they need to hear from the actual Canadians this is touching most.  Tell your story and don’t spare the details. Speak now in regards to the fallout from the last round of changes and ask for a cooling period before any further changes are implemented.  Ask they consult with the wider financial community for input.  We need all of you.  Whether you are a first-time home buyer, unable to refinance to the best rates, can not buy that next home you wanted, saw someone you care about be turned down OR if you are a part of an industry adversely affected.   Let’s get noisy Canada!!