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The Mortgage Insurance Market & Wholesale Lenders

The Mortgage Insurance Market & Wholesale Lenders

The Canadian mortgage market used to be very simple. We had the big banks, credit unions, and trust companies.

However, almost 20 years ago, the Canadian government made three major changes to the Canadian mortgage industry. First, the government and CMHC put their weight behind Canadian mortgages by guaranteeing an insurance payout to lenders in the event that a borrower does not pay. Yes, the Canadian taxpayers are on the hook if CMHC goes under.

Second, Canada also began to allow lenders to pay for mortgage insurance for their borrowers, even though the insurance was not required. Borrowers would not know that their mortgage is insured, rather the lender would pay for, and insure the mortgage on the “back end” in order to make the mortgage less risky. I.E: if the borrower did not pay, the insurer would pay the lender (just as they would pay if the borrower had less than 20% down payment and was charged for insurance themselves).

And third, Canada allowed its lenders to bundle up their mortgages and sell them to investors. The securitization of mortgages (the process of taking the mortgages and transforming them into a sellable asset) allowed investors to purchase many mortgages at once, knowing there would be a specific return. The return here would be just less than the interest rate on the various mortgages (less because the lender has to make a little bit of money for creating the mortgage bundle or security).

Now, mortgage investors are looking at two things: investment return and mortgage risk. The lower the risk of an investment, the lower the return an investor may be willing to see. Because Canadian lenders can insure their mortgages against default (non-payment), investors are very keen on purchasing these mortgages. Thus, investors provide lenders with a lot of inexpensive money to lend out, which in turn, provided for better interest rates for borrowers.

As an aside, an example of investors may be one of Canada’s large banks, an American bank, pension funds, and/or other financial institutions.

The result was the emergence and major growth of mortgage finance companies, called wholesale lenders or monoline lenders.

Monoline lenders, encouraged by access to cheap capital, set up efficient mortgage underwriting (approval) operations and were able to provide flexible mortgage products and better-than-the-banks interest rates for their clients.

The overwhelming majority of wholesale lender mortgages are back-end insured by the lender, packaged up, and sold to investors.

What is interesting here is that wholesale lenders will insure mortgages transferred from one institution to another – something that banks do not do. This allows for better interest rates when renewing with a wholesale lender than if renewing with your current bank lender.

If you have any questions related to your mortgage give us a call!

 

Top 5 Things To Consider When Building Your New Home

Building a new home – It’s something that many couples dream of. It can be an exciting, stressful, joyful, crazy time period that many walk away from saying “never again” or “bring on the next one!” We scoured the internet and sorted through our own experiences to bring you the Top 5 things to consider when you are building a new home.

1) It’s All In The Numbers

Just like house-shopping, building a home from the ground up requires you to know what you can afford. Most house plans offer a cost to build tool (usually for a nominal fee) to give you an accurate estimate of construction costs based on where you’re building. The numbers include the costs of construction, tax benefits, funds for the down payment and slush account, and other related calculations.

Once you have determined what you can and are willing to spend, meet with a mortgage broker to discuss how much you wish to borrow for your home.

Renovations and the actual building portion aside, we often are asked on what a mortgage looks like for a not yet built home. This is where a “construction” mortgage comes into play. The budget you give your broker should include your hard and soft costs as well as the reserve of money you plan to have set aside in case you run into unexpected events.

It’s this initial budget that a lender will determine how much you qualify for.

For example, based on the lender loaning up to 75% of the total cost (with 25% down):

Land purchase price (as is) Total soft and hard costs Total Cost (as complete)

$200,000

$400,000

$600,000 x 75% = $450,000 available to loan

Keep in mind, the lender will also consider the appraised value of the finished product. In this example, the completed appraised value of the home would have to be at least $600,000 to qualify for the amount available to loan. The appraised value is determined before the project begins.

As well, the client will have to come up with the initial $150,000 to be able to finance the total cost of $600,000. A down payment of $150,000 plus the loan amount of $450,000 = the total cost of $600,000.

2) Choose a Reputable Builder

Builders are a dime a dozen, but not all of them are qualified or will be the right one for your project. Careful research is needed when determining who will be the head contractor of your home-building project. Alternatively, one of the best ways to find your perfect contractor is by asking friends and family who have gone through the process. Another great source is your mortgage broker! They often have many industry connections to some of the most qualified contractors and builders. Ask them if they know of anyone—we can almost guarantee they can will have at least one or more referrals for you.

3) Build a Home for Tomorrow

It can be tempting to personalize your home to the tenth degree—after all you are building it to meet your unique, customized wants and needs. However, keep resale value and practicality at the back of your mind at all times. Life can often throw a few curve balls that lead to you-for one reason or another-having to place the home for sale. If that time should ever come, you want to be able to appeal to all buyers easily and not have to hold the house longer than necessary. Ask yourself if the features you are putting into your home will appeal to others and if the features suit the neighborhood you are building in as well.

4) Go Green!

Now more than ever before energy efficient upgrades are easy to add to your home. When you are in the design stages, selecting energy efficient appliances, windows, HVAC systems, and more can save you money in the long run and may also make you eligible for certain grants and discounts. For example, the CMHC green building program rewards those who select energy efficient and environment friendly options.

5) Understand the Loan

As a final note, once construction is done it’s crucial to understand how a Construction Mortgage Loan repayment works. To make it easier, we have a list of points that you should know:

  • Construction loans are usually fully opened and can be repaid at any time.
  • Interest is charged only on amounts drawn. There are no “unused funds.”
  • Once construction is complete and project completion has been verified by the lender, the construction mortgage is “moved over” to a normal mortgage.

A lender will always take into consideration the marketability of a property. They will look at
not only the location based on demographic but also the location based on geography. For instance, a lot that is in a secluded area where no sales of lots have occurred in the last five years and mostly consisting of rock face may not be a property that they are willing to lend on.

  • Depending on the lender, you may have a time frame within which you need to complete construction (typically between 6 and 12 months).

There are a lot of things to consider when you build a home but a few things that can keep you on track and on budget are to have a solid plan in place, work with a builder you trust, build a strong team around you that can be there from start to finish, and to do your research. Once you have decided to build, call your mortgage broker — they can help you get the ball rolling and can guide you to the first step of breaking ground on your new home

   

3 Mortgage Terms You Need to Know

Prepayment, Portability and Assumability

Prepayments

One of the most common questions we get is about mortgage prepayments. The conditions vary from lender to lender but the nice thing about prepayments is that you can pay a little more every year if you want to pay off your mortgage faster. A great way to do this is through prepayments.

They’re always something to ask your broker about because each lender is very different. You can always do an increase on your payments and that means that you pay a little bit more each week or each month when you make your mortgage payment. You can also make a lump sum payment. Perhaps you get a bonus every year or you get a lot of Christmas money. You can just put that directly towards paying off your mortgage. It goes right on the principle so you’re not paying interest on those extra funds. Paying a big chunk at once also means that a higher percentage of future payments will also go towards the principle.

Portability

Portability means that if you sell your house and you want to take your current mortgage and move it to your new house you can. The one thing about portability that we always have to keep in mind is that we can’t decrease the mortgage amount but we can do a little bit of an increase often through a second mortgage or an increase we call a blend and extend. It just gives you the flexibility of moving the mortgage from one property to the next property. It also gives you the flexibility of being in control of where you mortgage is going and not having to break your mortgage every time you decide to move.

Moving a mortgage to a new property avoids things like discharge fees, the legal cost of registering a new mortgage and the possibly of a higher interest rate. It’s sometimes works to your advantage to be able to keep that rate for the full term rather than having to break and pay those penalties half way through.

Assumability

Assuming a mortgage comes into play more often where there are family ties. Say your parents have a mortgage and you move into that house. Rather than you going out and getting a new mortgage and your parents having to pay those discharge fees, you have the ability to assume their existing mortgage at that current rate. All you have to do is apply and make sure you can actually afford the mortgage at what they’re paying. You have to be able to be approved on the remaining balance on the mortgage just like you would on any other mortgage. Just because your parents have an eight hundred thousand dollar mortgage doesn’t mean you’ll be able to take that over.

If you have any questions on any of these topics or any other, feel free to contact us for details.

   

Spring Into Action: Refinance Your Mortgage With the Help of a Mortgage Broker

We sprung forward last earlier this month by changing our clocks one hour ahead. For some, their microwave and oven clocks are once again displaying the correct time since the last time we needed to adjust our clocks (in the Fall). Patience is a virtue – except for when it comes time to refinance a mortgage!

The Spring is a busy time for mortgage brokers across the country. We welcome this change in season knowing that we are in the best position to give families mortgages that make sense for them.

This is the time of year that banks begin to send out their mortgage renewal notices. Some people will simply sign the documentation sent over from their bank and take on a new mortgage at the rate the bank has suggested. However, this is often not the right product at the best rate for which you and your family can qualify.

What is a Mortgage Renewal?

A mortgage renewal is when the current terms of your mortgage come to an end and you sign on for a new mortgage term.

The time is now to spring into action, up to four months ahead of your mortgage renewal deadline. By shopping around for the best mortgage rate for your financial circumstances, you may save yourself thousands of dollars. To do that, you may want to consider working with a seasoned professional – your local mortgage broker.

The benefits of working with a mortgage broker to help find a mortgage solution that works best for you are three-fold.

A mortgage broker gives you a second opinion.
While your current mortgage lender claims to have your best interest at heart, getting a second opinion on your financial situation does not hurt. There may be new options and products available for you that your current lender is forgetting or unable to offer. A second opinion on your changed financials may be able to save you money or highlight some new options that may be better suited to your needs.

A mortgage broker does the work for you, at no cost.
Some people are still concerned that hiring a seasoned professional to look at your finances and find new mortgage rates will cost a lot of money. This is a myth! Mortgage brokers provide their services at no charge, receiving a fee from the lending institution, not the client. We shop for the mortgage product that best suits your needs, at the best mortgage rates available to you on your behalf – all at no cost to you.

A mortgage broker does ONE credit check but can check MULTIPLE lenders without lowering your credit score.
One of the biggest advantages to having a mortgage broker shop around on your behalf is having them conduct one credit check and then using that information to shop around among several different lenders. If you wanted to shop around on your own, you would have to allow each institution to run a credit check and, as a result, lower your credit score. Working with a lender also means a lot less paperwork for you, too!

In short, a mortgage broker does the legwork on finding the best mortgage rate for you, at no cost and with only one credit check. Be sure to spring into action this Spring to and get a jump on your mortgage renewal process.

   

But They Said It Was Portable…

The question most often asked: ‘Is my mortgage portable?’

The answer most often given: ‘Yes.’

This answer is increasingly wrong.

In reality you qualify to move ~80% of the balance… maybe.

If you are thinking of:

  • Moving (upsizing or downsizing)
  • Locking a variable-rate mortgage into a fixed-rate product

… you would be well served to keep reading.

The above question is incomplete. To be fair, you would have no way of knowing this. The person answering it should know better than to give you a one-word answer.

The proper question: ‘Do I need to re-qualify for my current mortgage to move to a new home?’

The proper answer: ‘Yes, your mortgage is portable, but only if you re-qualify under today’s new and more stringent guidelines.’

The person answering the portability question should only be your mortgage specialist. They alone can answer the question accurately, and only with a complete and updated application, along with all supporting documents to confirm the maximum mortgage amount under current guidelines.

Too many clients learn this lesson the hard way. They sell their existing property before speaking with their Mortgage Broker, and in some cases they also enter binding purchase agreements under the mistaken assumption they can just port their mortgage.

Key Point – Do not ask if your mortgage is portable (99% of them are). Ask if you currently qualify to move your mortgage to a new property.

Key Point – The federal government has created a dynamic in which there are two different qualifying rates for mortgage approvals. And the one used yesterday to get you into a five-year fixed rate mortgage is not always the same one that is used if you want to move that same mortgage to a new home down the street, even just one day later.

Key Point – One day into your five-year fixed mortgage, you are now subject to the stress test. In a nutshell, the stress test applies the higher qualifying rate and effectively reduces your maximum mortgage approval by ~20%.

Meaning that you may only be able to port 80% of the current balance to another property… just one day later.

So, what’s the fix?

The best fix – The government could add a simple sentence to their lending guidelines along the lines of ‘If a borrower qualified for their mortgage at the five-year contract rate at inception, then the borrower shall be allowed to re-qualify at that original rate when moving their mortgage to a new home.’

Currently this fix does not exist.

The current fix – Well it’s no big deal at all. You simply pay a penalty to break your current five-year fixed mortgage and then apply for a new five-year fixed mortgage. Said penalty amount? Typically, around 4.5% of the mortgage balance – i.e., a $14,000 penalty on a $300,000 mortgage balance.

Seems reasonable, right?

It’s entirely unreasonable. This is a horrible ‘fix’, because it is not a fix at all. If you bought with 5% down, and then a few months later were transferred to another province and had no choice but to move, this represents your entire down payment vanishing due to an oversight by the federal regulators.

If you have been personally caught in this ‘portability trap,’ it felt more like total devastation than it did ‘anecdotal’. And by all means you should make your voice heard. Share your story with via www.tellyourmp.ca

   

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