16 May

Do You Understand the B-20 Mortgage Guidelines?

Mortgage Tips

Posted by: Jordan Thomson

A new survey has emerged showing that out of 1,901 owners and would be homeowners, 43% (more than two out of five) Canadians are not confident in their knowledge of the mortgage stress tests—despite them being in place for more than a year now.

We wanted to give you a brief set of notes regarding the guidelines. This is something you can use and reference whether you are a first-time home buyer or looking to refinance underneath these new guidelines. It gives a clear picture of what/how you are impacted as a buyer or someone who is looking to refinance.

Here’s what you need to know about B-20:

The average Canadian’s home purchasing power for any given income bracket will see their borrowing power and/or buying power under these guidelines reduced 15-25%. Here is an example of the impact the rules have on buying a home and refinancing a home.

PURCHASING A NEW HOME

When purchasing a new home with these new guidelines, borrowing power is also restricted. Using the scenario of a dual income family making a combined annual income of $85,000 the borrowing amount would be:

Up To December 31 2017 / After January 1 2018
Target Rate 3.34% / 3.34%
Qualifying Rate 3.34% / 5.34%
Maximum Mortgage Amount $560,000 / $455,000
Available Down Payment $100,000 / $100,000
Home Purchase Price $660,000 / $555,000
REFINANCING A MORTGAGE

A dual-income family with a combined annual income of $85,000.00. The current value of their home is $700,000. They have a remaining mortgage balance of $415,000 and lenders will refinance to a maximum of 80% LTV. The maximum amount available is: $560,000 minus the existing mortgage gives you $145,000 available in the equity of the home, provided you qualify to borrow it.

Up to December 31, 2017 / After January 1 2018
Target Rate 3.34% / 3.34%
Qualifying Rate 3.34% / 5.34%
Maximum Amount Available to Borrow $560,000 / $560,000
Remaining Mortgage Balance $415,000 / $415,000
Equity Able to Qualify For $145,000 / $40,000
Source (TD Canada Trust)

These guidelines have been in place since January 1, 2018 and we are starting to see the full impact of them for both buyers and those looking to refinance. Stats are showing that there is a slowdown in the real estate market, however there is also a heightened struggle for many buyers to now obtain approval under these new guidelines. It’s a difficult situation as the cry for affordable housing is still ongoing as the new guidelines may slow down the market but appear to further decrease the borrowing/buying power of individuals.
Keep in mind, this is just a brief refresher course on the B-20 guidelines. As always, if you have more questions or are looking for more information,I suggest that you reach out to discuss and get a full and detailed look at how it will impact you personally.

Thanks to DLC’s Geoff Lee for this info.

9 May

Sole Proprietors and Mortgage Qualification

Mortgage Tips

Posted by: Jordan Thomson

Sole proprietors are individuals who run their own business and do not have it set up as a corporation or partnership. The biggest difference between them and a corporation is that a sole proprietor does not have separation between their business and themselves. This means that when taxes are filed, all costs that are essential to the operation of the business are tax deductible on the individuals tax return. For example, an electrician who operates as a sole proprietor may earn $80,000 a year in income. However, costs such as materials, vehicle expenses, office space, or marketing (to name a few), are subtracted from the gross income- $80,000 in this case.

If those costs added up to $15,000 in a fiscal year, that sole proprietor really only earns $65,000 of income in the eyes of the lender. That is because the amount they are taxed on is the net income of $65,000 not the gross business income of $80,000. When submitting an application for a sole proprietor, you can either use a 2-year average of the net business income (income qualified) or state the income (stated files) based on history of earnings and the businesses write offs/expenses.

Majority of the time, we take the previous two years of income reported on line 236 of the T1 Generals, add them together, and divide that by two. If a business earned $80,000 of gross income and $65,000 of net income in year 1, and then $90,000 of gross income and $70,000 of net income in year 2, their income in the eyes of the lender is $67,500 ($65,000 + $70,000 = $135,000/2 = $67,500). There is an opportunity to “gross up” the 2-year average by 15%, but that requires a closer look at what the business has claimed as write offs for their business expenses. A gross up of 15% on $67,500 of income would equal $77,625.

Operating a business as a sole proprietor is a small cost when comparing it to a corporation, main reason being there is only one tax return prepared for both the business and the individual. The down side, an individual must pay income tax at the personal tax rate on the entire net income, whether they required all that income or not.

A corporation on the other hand, pays income tax at a different tax rate lower than the personal tax rate. That way, an individual only needs to take the income out of the corporation that they need, decreasing the amount of income tax they pay on their personal tax return (if money is left inside the corporation).

If you are a sole proprietor and are curious to know what kind of mortgage amount you can qualify for, let’s talk!

30 Apr

Accessing Your Home’s Equity to Invest

Mortgage Tips

Posted by: Jordan Thomson

To tap into your home’s equity, it all starts with refinancing your home. If you own a home, the equity you have built up in it is one of the most valuable assets you have available to you. It is also much more accessible than taking out a large loan. In many cases, home equity loans and lines of credit can offer you a lower interest rate as compared to other types of loans while providing you with access to credit for investment purposes. You can view an excellent comparison of loans here.

Often times we see clients who refinance in order to:
• Renovate their home
• Purchase a secondary property for investment purposes
• Debt consolidation
• Business Development
• Assisting their children’s post secondary education
• Financing thru a “life event” such as illness

In this particular article, we are going to highlight the value of utilizing your home’s equity to reinvest in other investments such as:
• rental properties
• stocks
• bonds
• mutual funds
• RRSP’s
• RESP’s
The first question that people ask is how much can I borrow? Generally speaking, you can borrow up to 80% of the appraised value of your house. For example, if your home value of $650,000 assuming one qualifies, they can access up to 80% of $650,000 which would be $520,000, if their current mortgage is $450,000 they may be able to get a home equity line of credit for $70,000 (totaling $520,000)

Working with your mortgage broker, you can go through the refinance and approval process if this is something you are interested in accessing. It is always a good idea to consult with your broker and understand the personality of your mortgage—there may be limitations of how much equity you can access and the conditions relating to the refinancing. There are also potential costs associated with this type of refinance including:
• Penalties to break your mortgage
• appraisal fees
• title search
• title insurance
• legal costs
Keep in mind that these potential costs can be rolled within your new loan amount and will not be “out of pocket.”
Now, if you have been approved and are utilizing your home equity for one of the above investments (after speaking to your financial planner/advisor first) and can expect to see a higher rate of return than the interest you are paying to borrow the money, then it is worth considering. We emphasize that you should always proceed with caution and get advice from sound professionals before choosing to invest your hard-earned money.

We have found that this type of investing works extremely well for many and is a safer and less risky way to access funds for further investment purposes. We recognize that this option may not be suitable or comfortable for some, but it is a viable way to capitalize on the equity sitting in your home and make it work for you! If you have questions or are interested in learning more, please do not hesitate to contact me at 604.725.1607.

12 Apr

7 Step Checklist to the Home Buying Process

Mortgage Tips

Posted by: Jordan Thomson

It’s important to understand the home buying process, so here’s a 7-step checklist.

Step 1: Down Payment
The hardest part to buying a home is saving the down payment (a gift from the Bank of Mom & Dad also works).
• For purchases under $500,000 minimum down payment is 5%.
• Buying between $501-999,000 you need 5% on first $500,000-PLUS 10% down payment for anything over $500,000.
• Buying a home over $1 million you need 20% down payment.
For any home purchases with less than 20% down payment, you are also required to purchase Mortgage Default Insurance.

Step 2: Strategize, Define Your Budget and get Pre-Qualified
Unless you can afford to buy a home, cash in hand, you are going to need a mortgage.
You need to get pre-qualified, which should not be confused with the term pre-approved.
The big difference is that no approval is ever given by a lender until they have an opportunity to examine the property that you wish to purchase. The bank may love you… but they also must love the property you want to buy.
Pre-qualifying will focus on gathering documentation to prove the information on your mortgage application including credit, debt load, income/employment, down payment etc.
Mortgage brokers will make sure you get a great mortgage rate. Just as important as rates are the terms of your mortgage which should include:
• prepayment options (10-20%)
• penalties
• portability
We also discuss what type of mortgage fits your current situation
• fixed vs variable?
• life of the mortgage (amortization) 25 or 30 years etc.
• payments – monthly, semi monthly, accelerated bi-weekly

Step 3: Set Your Budget
Keep in mind that just because you’re pre-qualified for a certain amount of mortgage, doesn’t mean you can actually afford that amount. Prepare your own monthly budget to be sure.
Typically, your total home payments (including mortgage, property taxes, strata fees & heat) should not exceed 32-39% of your gross (pre-tax) income.

Step 4: Find the Right Property – Time to Engage a Realtor
Once you have been prequalified for a mortgage, based on your budget… you need to find a realtor.
Selecting the right real estate agent is a very important step in the home buying process. When you work with an agent, you can expect them to help you with many things, including:
· Finding a home
· Scheduling tours of homes
· Researching the market, neighbourhood and home itself
· Making and negotiating your offer to purchase, and counter-offers
· Providing expert advice on home buying
· Handling the offer, gathering documentation and closing paperwork
I recommend interviewing at least three realtors. You will quickly decide who has your best interests in mind. Do you want to deal directly with a realtor who’s going to work with directly when you go home hunting, or do you want to deal with a BIG name realtor, who has buyers & sellers realtors working under them? There are advantages to each – you need to decide what is the best fit for your situation.
Get referrals for realtors from friends and family… OR ask me, I have a group of realtors that I know and trust.

Step 5: Mortgage Approval
Once you have found the property you would like to call home, your mortgage broker will send your mortgage application and property information to the lender who is the best fit for your situation, based on your input.
If the lender likes your financial situation and the property, they will issue a “commitment” letter outlining the terms of the mortgage. The lender will send you a list of documents, so they can verify and validate all the information you told them on the mortgage application.

Step 6: Time for the Solicitor (Lawyer or Notary)
Once the lender has reviewed and approved all your mortgage documentation and the property documentation, your file will be sent to your solicitor (in B.C. you can use a lawyer or notary). They will process all the necessary title changes and set up a time for you to meet, review mortgage documents and sign.

Step 7: Get the Keys
On the closing day the documentation for your home purchase will be filed at the land titles office by your solicitor. Typically, the possession date is 1 or 2 days later, giving time for the money (down payment & mortgage) to get to the home seller. On possession day you set up a time to meet with your realtor to get the keys.
Congratulations you’re done – you now own your home!!
Mortgages are complicated, but they don’t have to be… I’m only a call away.

Thanks to Kelly Hudson at DLC for the list!

10 Apr

Income Qualified

Mortgage Tips

Posted by: Jordan Thomson

There are several different ways a borrower can qualify for a mortgage when it comes to their income. One of the most common ways is known as income qualified. All of the following methods of employment income are under the income qualified umbrella:

1) Annual salary income employees
2) Full time employees working guaranteed weekly hours
3) Part time employees working guaranteed weekly hours
4) Auxiliary/On-call employees with 2-yr history at same employer
5) Commission Sales who have 2-yr history in same job/industry
6) Employees earning gratuities who have claimed over 2-yr history
7) Contract employees with 2-yr history at job/industry
There are a couple more types of employment that may fall into this category, but for the most part, these are the types of borrowers whose mortgage application is going to be done using income qualifying.

When it comes to the first 3, a borrower’s income is paid by a business in which they generally do not have any interest/ownership in. This means, an human resources representative or a supervisor can write a letter of employment stating the weekly guaranteed hours, the guaranteed hourly pay rate, the start date, and the employee’s position. The lender will then use this letter, a most recent pay stub, as well as verbally confirm the letter with the employer to verify a borrower’s income. This is how a borrower who works guaranteed hours or salary has their income verified and qualified on a mortgage application.

For numbers 4 to 7, lenders and mortgage brokers will verify and qualify a borrowers income a little differently. Because an employer does not guarantee hours or income, we need to see that there has been at least a 2-year history making the same amount. This 2-year history will usually need to be with the same employer and will need to be documented on your personal income tax returns to the Canadian Revenue Agency. The income amount on your line 150 of your T1 General Tax Returns for the past 2 years are added together and then divided by 2. The amount you get is the income you are allowed to use on your mortgage application and this is then verified by a letter of employment stating you have in fact been an employee there for more than 2 years, your are currently working there, your position, as well as a pay stub showing year-to-date income that is comparable to your 2-year average given the month you are in.

The same process would be used for those who earn over time or bonuses, claim tips, or work part time with two jobs. If you have any questions, let me know, I’m here to help!

Thanks to DLC contributor Ryan Oake for this info!

14 Mar

3 “Rules” of Lending- What Banks Look at When You Apply for a Mortgage

Mortgage Tips

Posted by: Jordan Thomson


Buying a home is usually the biggest purchase most people make and there are a lot of factors to consider. My job is to provide you with as much information (as you can handle!!) so you can make the best decision based on your particular situation.

The 3 “rules of lending” focus on determining the maximum size of mortgage that can be supported by your provable (what you paid taxes on) income.

You need to consider two affordability ratios:

Rule #1 – GROSS DEBT SERVICE (GDS) Your monthly housing costs are generally not supposed to exceed 36-39% of your gross monthly income. Housing costs include – your monthly mortgage payment, property taxes and heating. If you are buying a condo/townhouse, the GDS will also include ½ of your strata fees. The total of these monthly payments divided by your “provable” gross monthly income will give you your Gross Debt Service.
Mortgage payments + Property taxes + Heating Costs + 50% of condo fees / Annual Income

Rule #2 – TOTAL DEBT SERVICE (TDS) Your entire monthly debt payments should not exceed 42-44% of your gross monthly income This includes your housing costs (GDS above) PLUS all other monthly payments (car payments, credit cards, Line of Credit, additional financing, etc.). The total of all your monthly debts divided by your “provable” gross monthly income will give you your Total Debt Service.
Housing expenses (see GDS) + Credit card interest + Car payments + Loan expenses / Annual Income

What about the other 56% of your income?? This is considered to be used up by ‘normal’ monthly expenses including: taxes, food, medical, transportation, entertainment etc.)

Rule #3 – CREDIT RATING Everyone who will be on title to the property will need to have their credit run. Your credit bureau is important because it shows the lenders how well (or not) you have handled credit in the past. This gives them an indication of how you will handle credit in the future, and will you be a good risk and make your mortgage payments as promised. If you handle credit well, you will have a high Credit Score and get the best interest rates from the banks/lenders. If you have not handled credit well, and have a poor credit score, you will either be charged a higher interest rate or your application will be declined.

Want to know what your mortgage qualification amount is based on these factors?

Set up a mortgage review phone call with me, where I can determine what your affordability ratios are, strategies to improve them if you want/need to qualify for more mortgage and an overall mortgage pre-qualification amount!

23 Jan

Buying Your First Home? These Tips Will Save You Time and Money

Mortgage Tips

Posted by: Jordan Thomson

So you’re wanting to buy a new home? It’s definitely an exciting time! First question, are you prepared?!
We all know big-item purchases are scary. It’s expensive, you are fully committing to this household – there is no turn backing without that pricey consequence. I totally get it.
The ultimate first-step is to do your research. You are going to want to find out the essentials before you start hunting for those pretty houses listed on Pinterest!
Let’s start here.

Credit History
• How many credit cards do you currently have under your name?
• Do you pay your bills on time?
• How many loans do you currently have?
If you own a credit card or have a loan with an established bank, you have credit history. This information is then transferred into a financial summary known as a credit report.

Credit Report
Your credit report states these vital pieces of personal information (DO NOT let other people in on your personal finances. This should be a given by now!)
• first and last name
• home address
• social security number (SIN)
• credit cards
• loans
• how much money you owe
• whether or not you pay your bills on time
All this ‘credit’ talk is important because it allows lenders to determine IF they will lend you money. Your lender, whoever you choose to go with, will be on your credit situation right away. The sooner you know what is on your credit, the better!
As for your credit score, it’s best to only have it checked once as having multiple credit checks by different lenders can cause it to change. Mortgage planners like myself only need to initially do a credit check once, which we can then use for all the lenders, saving you from multiple checks which could hurt your score.

Employment
It is important to have a steady income and also proof of employment for the last two years. Any changes to your employment have to be explicitly explained. Gathering these documents ahead of time can save headaches later.

Down payment
In Canada, you need to show a 90-day history of the down payment to prove you have not borrowed the money. We will need to see any movement of that money within the 90 days, so its best not to move it around. You are allowed to get a gift from family for the down payment but this money must not be repayable and we will need a letter from that gift giver explaining that!

Consult Your Wish List
It’s good to know what you want in a home if you can do it realistically. Buying a house for two? Thinking of expanding your family? You need to consider what life will look like down the road before you commit and sign that paper. Nothing would be worse than to move into a house that eventually ends up being too small because a couple of kids came into the picture or in a similar situation those grown-up kids come back home from college, university – you get the picture.
It’s also reasonable to think about factors in your dream home such as maintenance, renovations, the longevity of your stay, etc. Cover all bases, it is way better to be safe than sorry.

Finding a Broker
Who should you use to find the best mortgage for you? I think a Broker (like me), especially if you’re a first-time home buyer. There are many lenders in Canada and a broker will be able to sort through all your options.

Finding a Realtor
When it comes to a realtor, you want someone reliable. Makes sense right? A couple of ways you can find out whether or not a certain realtor is legit is by doing some online research:
• Do they have a website/social media accounts? Go check it out!
• Double-check if their licence is registered and legitimate
• Look up their client feedback/disciplinary comments against them
• Check out their current listings – price range, are they a busy/relaxed business?
• Send them an e-mail with any questions! Do they have the appropriate knowledge?

Feeling better about buying that first Home? That’s exactly what I like to hear. If you have any other questions, call me today on 604.725.1607 or email jordan@citywidemortgage.ca

8 Nov

How to Get a Free Copy of Your Credit Bureau

Mortgage Tips

Posted by: Jordan Thomson

Think of your credit score as a report card on how you’ve handled your finances in the past. A credit score is a number that lenders use to determine the risk of lending money to a given borrower.

There is always someone willing to lend you money however, higher risk = higher rates!

Step 1 for good credit – you need to know your credit history
• In Canada there are 2 credit bureaus – Equifax and TransUnion.
• You can receive a FREE copy of your credit report from both Equifax Canada and TransUnion Canada once a year
• You can pay Equifax or TransUnion for a digital copy, which is much faster, BUT you have to pay, which sucks.

I recommend you order a copy of your credit report from both Equifax Canada and TransUnion Canada, since each credit bureau may have different information about how you have used credit in the past.

Ordering your own credit report has no effect on your credit score.
• Equifax Canada refers to your credit report as “credit file disclosure”.
• TransUnion Canada refers to your credit report as “consumer disclosure”.

Once you have obtained your free credit report, check it for errors:
• Are there any late payments that have been erroneously attributed to your credit history?
• Are the amounts owing in your credit report accurate?
• Is there anything missing on your credit bureau
o Sometimes the credit bureau has more that one file with your name, which can be merged, but it takes time.

If you find any errors on your credit report, you need to dispute them with your credit bureau.

How can I get a copy of my credit report and credit score?

There are two national credit bureaus in Canada: Equifax Canada and TransUnion Canada. You should check with both bureaus.

Credit scores run from 300 to 900. The higher the number, the greater the likelihood a request for credit will be approved.

The “free-report-by-mail” links are not prominently displayed, since credit bureaus would love to sell you instant access to your report and credit score online.

Equifax, the instructions to get a free credit report by mail are available here.

For TransUnion, the instructions to get a free credit report by mail are available here.

The bottom line: when it comes to financing your life, through credit cards, mortgages, car loans or any other kind of debt – your credit score has a BIG impact on what kind of terms you can negotiate.

Keeping an eye on your credit score is important — if there’s a problem or an error, you want to know and have time to fix it before you apply for a loan. If you have any questions, please feel free to give me a call at 604.725.1607 or email jordan@citywidemortgage.ca.

Thanks to DLC’s Kelly Hudson.

6 Nov

Should You Be Paying Your Mortgage Down Aggressively

Mortgage Tips

Posted by: Jordan Thomson

Last year a third of mortgage holders in Canada chose to pay their mortgages aggressively, which is to say they paid more than the amount required. And the numbers were higher for those who bought their properties after 2013.

Instinctively it would make sense to pay off your mortgage as quickly as you can, to reduce your debt and to build up more equity in your home in case you wanted to borrow against it.

But this isn’t always the case.

When does paying your mortgage aggressively make sense?

Canwise Financial President James Laird identified three kinds of people for whom an aggressive payment plan would be prudent.

The first are people who have mortgages with a high interest rate, since any additional payments (also known as prepayments) go towards reducing the principal. This will lower payments faster and puts you in a better negotiating position when the time comes to refinance.

The second kind are people with access to a Home Equity Line of Credit (HELOC), which can be used as their emergency fund. In that case, the money you’d otherwise put away for unexpected purchases might as well go towards your mortgage.

The third group are people uncomfortable with other investment vehicles like stocks and bonds. The big positive to paying a mortgage down aggressively is that it entails zero risk. And it’s better than letting the money sit under the mattress.

Renee Dadswell, Mortgage Trainer at Mortgage Professionals Canada and a mortgage agent at The Mortgage Station, added one more category of people well-suited to aggressively paying down their mortgage: those with refinanced mortgages where the money was used to purchase items with a shorter lifespan, like a car. “You don’t want to be paying for the car 15 or 20 years later when you don’t even own it anymore,” says Dadswell.

When does paying your mortgage aggressively not make sense?

“If you have a super low rate, don’t rush to pay it back,” Laird recommends. “It’s cheap money. Take advantage of it.”

Another instance where paying a mortgage down aggressively would be unwise is when the property in question is a rental property or houses a home-based business. “A portion of the interest (on rental properties and homes with home offices) are tax deductible,” says Dadswell. “In these cases, aggressive payback could have very negative tax effects.”

A third argument against an aggressive mortgage payback plan is if you can find another investment that gives you a better return. “If you put $100,000 into your 3.00% mortgage, you save $3,000 next year,” says Laird. “If you made a 5% return on that $100K instead, you could put that $3K towards your mortgage next year and still have $2K left over.”

How could you pay your mortgage more aggressively?

Like with anything else, how your money goes out should be a function of how it comes in.

If you’re a salaried employee and just got a significant pay raise, you could choose to increase your regular payments and direct that extra money towards the principal.

If your extra money comes to you as a year-end bonus or an owner’s dividend, you could choose to make a yearly lump-sum payment towards the principal.

Note that many full-featured mortgages come with flexible prepayment options that allow the borrower to increase their monthly payments by up to 100%, and allow for annual lump sum payments of up to 25% (though typically between 10-20%).

Either way, Dadswell offers this word of caution: “The goal of living in a house is to enjoy it and make memories in this home. If your budget is so tight that you cannot enjoy the house as a home, you will regret the purchase,” she said.

“A mortgage will most likely be your largest debt,” says Laird. “The payment schedule will inform the rest of your financial life, from your monthly budget to RRSP/RESP planning to how much you can save.”

Both Laird and Dadswell agree that a consultation with a mortgage broker and your financial planner should happen before putting an aggressive mortgage payback plan in place.

“You’ll get the right perspective on your goals and how putting more towards your mortgage will impact those goals,” says Laird.

And when you’re contemplating having less money in your pocket at the end of the month or year, the right perspective is a good thing.

Canadian Mortgage Trends