(December 24, 2021)

Intro (pre-amble): up to 14:55 mark of podcast (BulletproofMortgagePreApprovals | Relax, you’ve been stress tested! | 122,748 New Canadians | City Hall & Pitchforks)

In a hot market like we are in right now, mortgage pre-approvals have become front and centre…particularly, the quality and legitimacy of them.  Here in Vancouver (and I am certain in Toronto as well), buyers are placing offers with no financing conditions…and even though I strongly advise against it, I continuously keep on getting subject free offers, one after another.  So at the very least, my goal with this blog post is to make sure that people realize that the more work you put into the pre-approval process, the smoother and less stressful your time-restricted purchase process will be.

Step 1 – Get your credit score where it needs to be and deal with any issues you currently have

Whether you qualify for a mortgage through a bank, credit union or other financial institution, you should be aiming for a credit score of 680 for at least one borrower (or guarantor), especially if you are putting under 20% down. If you are able to make a larger down payment of 20% or more, then a score of 680 is not as critical.  However, whatever you do, avoid dipping below a score of 610…you may still qualify for a mortgage, but your interest rate will likely be higher.

If your credit score does not meet the minimum requirements, follow these steps:

• Pay your bills on time
• Avoid carrying balances on your credit cards that are greater than 60% of your limits…this directly impacts your credit by decreasing your score
• If you are currently carrying a credit card that is max’d and you are not able to reduce it, consider transferring some of the balance to another credit card (or line of credit) so as to come within a 60% balance to limit ratio.  So basically, you are borrowing from Peter to pay Paul.  Not a long term strategy to pay down your debt, but definitely a quick fix credit score booster in the short term.

Avoid petty disputes with creditors.  Take the hit and pay up, or suffer detrimental credit downgrades and derogatory ratings that eventually end up being deal killers to mortgage approvals.

Step 2 – Have your down payment funds confirmed and ready to go

The minimum down payment requirement is 5% of the purchase price.  It is critical to disclose the source of your down payment to your mortgage broker as not all sources of down payment may be acceptable for your particular qualification.  

Here are some examples of down payment verification:

• Gifted proceeds from direct family members are acceptable, but the amount that is acceptable varies with qualification guidelines 
• Proceeds from abroad must be meticulously documented from its originating source (documents must also be translated in English)
• Borrowed funds can be used for down payment, but your mortgage qualification amount could substantially be reduced as a result
• 60 to 90 day history disclosures are required for essentially all down payment proceeds UNLESS you have sold an asset or property.  In this case, you would have to provide a paper trail verifying the sales transaction of the asset and the deposit of funds into your bank account (i.e. investments, vehicles, property, etc).  60-90 day verification for gifted down payment proceeds are rarely required.

Step 3 – Understanding and selecting the right mortgage product for YOUR particular circumstance

Rate is only ONE of the many features in selecting the best mortgage product that meets your financial goals.  Here are some other features to be aware of when selecting a mortgage product:

• Mortgages with minimal discharge fees (penalty) in the event you sell your property ahead of its term
• Cash Back mortgages that advance as much as 5% of the mortgage to be used for whatever you desire (pay off debt, purchase furniture, renovate)
• Purchase Plus Improvement Mortgages advance up to 10% of the properties value to be used for immediate improvements to the property
• Enhanced prepayment privileges are available on some mortgages that allow you to make larger lump sum payments towards your mortgage principle throughout your term and in some cases allow for unlimited lump sum payments without any penalty charges
• Auto-HELOC mortgages allow your ongoing paid mortgage principal to automatically convert to accessible equity on a monthly basis

Step 4 – Accept the fact that you will have to provide a large amount of documents

When you apply for a mortgage, you will typically need to provide a standard package of documents, which almost always includes:

• Your government-issued personal identification
• most recent pay stub
• employment letter
• most recent 2 years of personal income tax documents (Notice of Assessments, T-Slips, and T1 Generals)
• if you are self employed (incorporated) the most recent 2 year Business Financials may also be required
• 3 months of bank account statements
• 90 day verification of your down payment proceeds (see above if you are not able to display a 90 day history)

Prepare to provide documentation to explain any unusual (generally non-payroll) large deposits or withdrawals over $2,000 as per the Proceeds of Crime (Money Laundering) & Terrorist Financing Act enacted by the Government of Canada and applicable to all lenders in Canada.  

Step 5 – Get it all on Paper

After completing all of the above, you should now have completed a legitimate mortgage pre approval!  Along with reaching this milestone, you should also be provided with some type of document or detailed email that includes several analytical details and a summary list of the critical qualifying conditions.  At this stage you should have all your questions answered and be fully informed of your qualification.  The following points should be disclosed in a mortgage pre approval report:

• the maximum mortgage amount should be calculated and outline in particular detail
• a purchase scenario should be illustrated to include all potential fees and closing costs so that you are aware and fully understanding of what your cash-to-close requirement will be.  This scenario calculation should include any or all of the following as applicable: insurer premium, broker fee, lender fee, property transfer tax, etc.
• disclosure of your credit score and instructions or requirements to maintain it throughout the qualification period
• and lastly, a detailed list of the critical conditions upon which the qualification is based upon (i.e.maintaining your employment, your credit score, paying off particular debts, providing updated income documents every 30 days leading up to the day your pre approval becomes live, etc) 

Getting approved for a mortgage is a time consuming process and during a live offer on a property, time is of the essence.  Having to make critical decisions in a limited time frame and when you are highly emotional is a recipe for disaster.  Get fully prequalified and refer back to your pre approval document as a guide throughout your buying process.  For more info on mortgage pre approvals, Click Here to listen to my past podcast episode, “Is your mortgage pre approval legit?”.

Step 6 – this is for people who are considering placing a subject free offer…HAVE A BACKUP PLAN IN PLACE

This is probably the most critical step of all (if you are placing an offer with no financing conditions).  I’m not sure that many mortgage brokers do this, but I certainly do.  If you plan on going subject free on an offer, prepare to not just complete all of what I just stated above, but also prepare to have a conversation about what your backup plans are in the event you are forced to move in that direction.  HERE are the most common backup plans that I have experienced over the last several years:

• Have a parent (or anyone else) on standby to jump in as a co-applicant or cosigner
• Have a parent or close family member on standby if a larger down payment is required
• Understand and accept the consequences of potentially proceeding with a “Plan B” mortgage with a higher interest rate and additional fees

The bottom line…subject free offers are risky to begin with, but they are especially risky if you don’t have a back up plan.

Step 7 – You are now ready to shop for a home!

With your fully vetted mortgage pre approval in hand you are now ready to start shopping for a home!  And remember, even though you are pre-approved, always insist on requesting financing conditions in your offer regardless of how strong your pre approval report is.  Be aware that the one critical item that is not accounted for in a mortgage pre approval is the subject property itself.  It is possible that lenders could reject a property and decline the mortgage application.  So whenever possible, protect yourself and request financing conditions.

Contact Marko, he’s a Mortgage Broker!

604-800-9593 direct Vancouver (Click Here to schedule a call with Marko!)

403-606-3751 direct Calgary (Click Here to schedule a call with Marko!)

markogelo.com

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(November 7, 2021)

Intro (pre-amble): up to 13:10 mark of podcast (Dealing with rising interest rates | Is affordability in Vancouver hopeless? | economic life without Alberta oil = not good)

With virtually every economic indicator calling for rate hikes, Canadian mortgage holders are left wondering how to prepare and react to the already-in-progress wave of interest rate volatility.  Regardless of the degree and timing of the pending increases, concerned mortgage holders in Canada have the opportunity to control their own destiny and minimize (or even eliminate) potential risks associated with rising interest rates (i.e. higher mortgage payments).  

Here are a few tips to be aware of in a rising interest rate environment:

• DONT PANIC, put things in perspective, and react accordingly.  WIth all the announcements surrounding rising interest rates it is critical to understand HOW or even IF it will apply to you, and if so, to what degree.  For example, on October 27 the Bank of Canada announced that they are anticipating the beginning of an upward trajectory in rate hikes.  Here are some tips on how to prepare and anticipate the pending (or speculative) rate increases:
  • unlike the random and spontaneous nature of fixed rate changes (they can happen at any moment without warning), Prime Rate changes operate in a more formal and orderly manner.  Every year the Bank of Canada releases a schedule of their interest rate announcements for the year, there are 8 scheduled announcements.  Knowing this, one is able to plan for and anticipate any pending changes as the announcements are very informative and revealing.  The BOC Governor (Tiff Macklem) openly discusses the reasoning for any rate change, then also provides hints on what to expect for the following announcement
  • past rate increases (or decreases) have typically been in 0.25% increments.  Here is an idea of how much a few 0.25% rate hikes would impact your monthly payment on a $500,000 variable rate mortgage with a Prime-1% discount:
    • $500,000 at todays prime rate of 2.45%-1% = $1,987/month 
    • Prime Rate increase to 2.70%-1% = $2,046/month
    • Prime Rate increase to 2.95%-1% = $2,106/month
    • Rate increase to 3.20%-1% = $2,166/month
• Time for a little…ADDITION by SUBTRACTION.  So, for a 1% increase on a $500,000 mortgage the payment would shoot up by $2,148/year -> $179/month -> $5.77/day.  No need to worry though…by using the powerful concept of addition by subtraction, we can win back the $5.77 budgetary spike by eliminating (or modifying) a daily routine…like replacing the costly Starbucks routine (this probably ranges anywhere from $3-$15 for most people).  So ya, maybe switch to Tim Hortons when interest rates go up, or maybe eliminate the entire experience of walking into a retail establishment to purchase your daily cup (or 2) of java and replace it with a good old home brew and travel mug routine…boom!  …you’re now back in the black and your monthly budget has come back down as though your interest rate hasn’t even changed (and for some, the budget has flattened even more depending on the frequency and degree of your daily Starbucks routine).  Put things in perspective, and react accordingly.  Long live ADDITION by SUBTRACTION!

• There are options, CONSIDER THEM.  Expand your decision making process and consider other mortgage products.  Most Canadians revert to a competitive 5 year fixed mortgage term and fewer opt for a variable rate mortgage.  But look beyond these products, ask your broker for more options and suggestions.  Brokers (as opposed to bankers) will have a broad range of products compared to a one-trick-pony resource like bank representatives.  There are several mortgage products that handle rate increases better than others, here are a few to consider:
  • CAPPED variable rate mortgages: Many people are simply not aware that there are variable rate mortgages available that feature a fixed payment.  Rather than a fluctuating monthly payment, these mortgages simply adjust the interest component within your payment to reflect the increase in prime rate.  For example if your monthly mortgage payment is $1,800 and prime rate increases by 0.25%, rather than increasing your $1,800 mortgage payment, the interest portion within the $1800 payment will internally adjust…so instead of allocating $500 of the $1,800 mortgage payment to interest, it would simply maintain the monthly payment at $1,800, but increase the internal interest component to $600. 
  • Hybrid Mortgages: these mortgages allow you to compartmentalize your mortgage with different products.  For example, let’s say your mortgage balance is $500,000.  Instead of signing for a 5 year fixed rate mortgage for the entire balance, you can break it into the following: $250,000 at a 5 year fixed rate + $100,000 at a variable rate + $150,000 in a Home Equity Line of Credit.  With this hybrid of products you can potentially hedge against any interest rate increases and achieve a high level of flexibility within your mortgage
  • Mortgage Terms other than 5 year fixed and Variable Rate: maybe your lifestyle and employment timeline isn’t suited for a 5 year timeline (the standard term for fixed rate and variable rate mortgages).  Consider a different length term…select strategically based on your specific timeline.  For example, let’s say you are expecting a pay increase in a couple of years but until then you need to maintain a strict budget…in this case, maybe get a 2 year fixed rate, then opt in to a more aggressive variable rate product when it’s time to renew.  Fixed rate mortgages are available from 1 year terms and upward, all the way to 10 year terms.
• We’ve already been stress tested for 5.25% – why all the shock now?   January 1, 2018 marked the day we started stress testing mortgage applications…since then, mortgage applicants have been qualifying for mortgages as though they were 2% higher than what they actually were (i.e. locking up a 1.79% 5 year fixed, but qualifying at 5.25%).  So in other words, all those that have qualified for a mortgage in the last 3 (or now approaching 4) years are actually stress tested for some interest rate volatility for up to 5.25%.  So, you’re good, no need to be fearful, anxious, depressed, sad, angry, etc…you essentially have been pre-approved to be a victim of interest-rate-increase syndrome.  Because you qualified at 5.25% (even though your actual contract mortgage rate could possibly be as low as 1.79%), you should be good and able for an increased payment.  So…chill out, you’re good.
• Rising interest rates do not affect mortgage qualification amounts.  Mortgages are qualified based on the pre-determined and less volatile stress test rate, not the published contract rate (the rate you actually sign for and are awarded).  So this means that even though there is ongoing rate activity in the markets, your mortgage qualification amount remains stable.  In the past three years, the mortgage stress test has only changed once; since 2018 it’s been 4.79%, then in June 2021 it spiked up to 5.25%.  Only in this instance mortgage pre-qualifications had to be re-adjudicated and adjusted accordingly (in this case, the purchasing power for mortgagors decreased)  However, in the same timeframe the published contract rate of 5 year fixed rate mortgages deviated at least 50 times spanning from a high of 3.24% to as low as 1.39%.

Contact Marko, he’s a Mortgage Broker!

604-800-9593 direct Vancouver (Click Here to schedule a call with Marko!)

403-606-3751 direct Calgary (Click Here to schedule a call with Marko!)

markogelo.com

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@markogelo (Twitter)

MarkoMusic (SoundCloud Account)…all podcast music tracks are performed and produced by Marko

(October 30, 2021)

Intro (pre-amble): up to 7:35 mark of podcast (Buying a home while selling your current one | Canada set to increase mortgage rates in 2022 | current 5yr & VRM rates)

The transition from selling one property to purchase another sounds simple, but there are a few critical events throughout the timeline that you need to be aware of.

Here are 6 key points to know when scaling up from one property to another:

(1) perhaps the biggest dilemma: SELL first, then BUY, or BUY first, then SELL?   

There’s neither a right or wrong answer.  If you are making a cash purchase and are not at all reliant on the proceeds from the sale of your current property to acquire the newly purchased one, then this is a non-issue (lucky you!).  Otherwise, the starting point for your game plan should begin with your numbers guy/gal, your mortgage broker.  For these types of transactions a mortgage broker should stress test your pre-approval to see if it endures the unlikely event that you are not able to sell your current property.  By stress testing your pre-approval you will know if you are capable of carrying two mortgages should you have to hold out for a prolonged period of time until your previous property sells.  Whatever you do, don’t just place an offer not knowing what your consequences are.  Call your broker or banker and ask that they stress test your pre-approval.

(2) Use a Bridge Loan so you can gracefully transition from one property to another!  

Most often when people are scaling up to purchase a bigger home, they require some or all of the proceeds from the sale of their current home to purchase the new home.  Many assume that the completion date for both transactions (the sale of your old home, and the purchase of your new home) need to line up on the same day so as to accommodate the flow of proceeds from the sale to the purchase on the same day.  This is true, for the most part, but what many aren’t aware of is that you can actually coordinate the closing dates so you can technically own both of the homes for a limited period of time, thereby allowing you to gracefully move out of your former property and into your new home within a span of a few days.  Bridge Financing Loans allow you to do this and are conveniently available by the lender that secured the mortgage on your new place!  Imagine closing on your new home on Friday and still having access to your former home for another few days so you can conveniently move your possessions from one place to the other with little or no stress at all.  Much better than trying to orchestrate everything on the same day and potentially risk being homeless for a few days in the event there are some financing, registration or servicing delays (it happens!).  For more information on Bridge Financing, Click Here to be redirected to a past blog where I explain the concept in greater detail.

(3) Consider porting your mortgage, but ONLY if it makes sense!

If you currently have an amazing interest rate on your mortgage and are wondering if you can transfer that same amazing rate/mortgage to your new house – the answer is yes!  Or, you may want to keep the existing mortgage intact as the break penalty is abnormally high.  Whatever your reason is, there is a built-in mortgage mechanism that allows you to do this, it’s called Porting.  In some instances you can maintain the exact interest rate that you currently have, but in many other instances you will be offered what’s known as a blended interest rate.  The Blended Rate may very well do the trick when you factor in the money you save by not paying the exorbitant break penalty, but other times it can prove more costly as the prevailing interest rates may be a better route.  Porting is complex and unique to every lender and is definitely worth considering, but be sure to analyse the proposal offered to you by your lender very carefully as it doesn’t always make good financial sense.  For more information on Porting a mortgage, Click Here to be redirected to a past blog where I explain the concept in greater detail.

(4) secure a Home Equity Line of Credit on your current property BEFORE you list it for sale

A Home Equity Line of Credit (aka HELOC) is by far the most flexible mortgage product available.  Just like a personal line of credit, you only pay on the balance that’s drawn, but where it outperforms the personal line of credit is by only requiring interest only payments and at a much lower interest rate.  For example, for a $50,000 Personal Line of Credit your monthly payment could equate to as high as $1,500 whereas with a HELOC it would be ~$125 per month!  The HELOC could come in handy during the offer stage on your new property when a deposit is required to secure the offer (especially if you’re considering a hefty deposit as part of your aggressive offer strategy), or you can also use it later in the process in place of or in cooperation with a Bridge Financing application.  Whatever the case may be, HELOCs come in handy and are a great transitory pool of funds to have available during a scale up real estate transaction.  Heads up though, it is important to apply for and implement your HELOC on your current property BEFORE you formally list your property for sale as lenders do not proceed with financing when a property is listed for sale

(5) call your existing lender and find out what your current mortgage balance and discharge fee will be

When it comes to real estate, there’s nothing worse than the unexpected.  Probably the first thing you should do when you consider scaling up is to call your current lender and review your balance and discharge fee (or commonly referred to as the break penalty).  I know you’re probably thinking…ok, obviously I’m aware of my mortgage balance and have accounted for it when calculating what my gross profit will be when I sell my property, and obviously I’m aware that my mortgage likely has a break penalty equivalent to 3 months of interest payments which I’ve also factored in to the net profit of my home sale.  But here’s the thing, the 3 month interest break penalty or your mortgage is where things get interesting (no pun intended, but feel free to laugh out loud).  Firstly, break penalties are not always determined using the three month interest rule.  Secondly, if your current mortgage is a fixed rate term, your break penalty is determined by the greater of 3 months interest payments, or Interest Rate Differential – whichever is greater.  So sometimes (especially in a decreasing rate environment) you may encounter an exorbitant penalty and this is likely a result of your IRD calculation being greater than your 3 months interest calculation.  And one more thing when it comes to mortgage break penalties…they can change radically (for the better or worse) at any given time, especially in volatile rate environments like we are in now.  Be in touch with your bank, or grant your mortgage broker authorization to frequently check in on your behalf with your lender to monitor the break penalty.  And lastly, if you currently hold a variable rate mortgage then you avoid the potential for the IRD calculation altogether as variable rate mortgages calculate their break penalties using only the 3 months interest calculation!

(6) If you’re planning to scale up at a specified time in the future, renew your current mortgage with the end in mind

If your mortgage renewal is coming due shortly, but your plans to purchase are still a year or two out, then renew to a product that has friendly break terms.  Rather than renewing into another 5 year fixed term consider a variable rate mortgage for the short haul or even look in to 1 or 2 year terms as either could potentially save you thousands of dollars in discharge fees when you eventually sell your home.

Contact Marko, he’s a Mortgage Broker!

604-800-9593 direct Vancouver (Click Here to schedule a call with Marko!)

403-606-3751 direct Calgary (Click Here to schedule a call with Marko!)

markogelo.com

Facebook

@markogelo (Twitter)

MarkoMusic (SoundCloud Account)…all podcast music tracks are performed and produced by Marko