31 Oct

Mortgages for Expensive Homes – Not as Easy as it Sounds!

Mortgage

Posted by: Kelly Hudson

 Large home purchases that require a mortgage present unique challenges in the Canadian Mortgage market. Sliding scales, director approval, multiple reviews, it all adds up to difficultly getting larger mortgages approved, unless you’re working with an experienced mortgage broker.

In 2012 the government of Canada removed the mortgage insurers ability to approve mortgages of $1 million (or more) with less than 20% down payment. As a result of this change, the minimum down payment for homes over $1 million starts at 20% of your purchase price and increases.

Since any home purchase over $1 million cannot be insured against default, the lender applies a sliding scale to reduce their potential for loss if the borrower defaults.  Consequently, large mortgages present a unique challenge, especially in the Vancouver/Toronto market. 

Depending where you live, most lenders consider home purchases over $500-750K to be large enough for them to want to mitigate their risk.  In larger urban centres like Vancouver & Toronto, lenders will consider purchases up to $1 million before increasing the down payment with sliding scale.

Sample sliding scales for Vancouver/Toronto

  • 20% down payment on the first $1,000,000, plus 40% down payment on the balance over $1,000,000
  • 20% down payment on $1,250,000, plus 50% down payment on the balance over $1,250,000
  • 20% down payment on $1,500,000 plus 40% down payment on the balance over $1,500,000

Every lender has their own risk level for expensive home purchases.

As you can see, the typical lender sliding scale for jumbo mortgages is very punitive and can result in a much higher down payment when purchasing a home over $1 million.

Lenders want to alleviate the higher risk on purchases of expensive homes, because there is a smaller pool of potential buyers compared to lower home prices. This makes expensive homes more vulnerable to market corrections.  If there is a price correction, it can be more difficult for lenders to get their money back, should they need to foreclose. 

Lenders are risk adverse!  When they perceive a risk, they are either going to charge higher interest rates OR lessen their risk with a sliding scale, requiring home buyers to put a larger down payment on properties over their threshold.

Example:

  • Base line with no sliding scale home purchase $1,500,000
    • Minimum 20% down payment = $300,000
  • Down payment required for a home purchase with Sliding Scale 20% down payment on the first $1,000,000, plus 40% down payment on the balance over $1,000,000
    • 20% down payment on $1,000,000 = $200,000
    • 40% down payment on $500,000 (amount over $1M) = $200,000
      • Down payment required $400,000

20% down payment = $300K versus sliding scale $400K down payment required – Yes sliding scale can make a big difference in your required down payment!

Sliding scale is designed so that as a property’s price increases, you need a larger down payment. 

  • Therefore, the maximum loan/mortgage amount available decreases on a proportionate basis.

To minimize the size of your down payment, you need an experienced mortgage broker who works with a multitude of lenders, giving you the most flexibility with sliding-scale.

Other points to keep in mind with a large mortgage:

  • Pay attention to the terms and conditions of your mortgage, especially your prepayment penalties.
    • Larger loan amounts amplify the differences in the penalties charged by different lenders.
  • Most large mortgage loans must be escalated up the ranks for management approval. This means it can take lenders an extra day (or two) to get your approval back so your subject removal date may need to be longer.
    • Typically, I recommend 10 business days for subject removal on large mortgages.

 Another important point to keep in mind, when real estate prices flatten or drop, lenders can become much more conservative when underwriting higher-end real estate. As such, there can be wide disparity in the value different lenders will assign to a property.

Partnering with an independent mortgage broker will help ensure that you and your property are matched with the lender who is offering the best fit for your situation.

If you know anyone looking for a high-end home, who needs a mortgage, I can help them arrange the financing.   We’ll work together to figure out a budget and down payment (based on sliding scale).  Then, we will work with a lender for a pre-approval, so we have a clear picture for affordability.  BLOG Pre-Approved for Your Mortgage…  What Does that Really Mean???

Mortgages are complicated, especially over $1 million… you need to engage an expert!!!   Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Broker
DLC – Canadian Mortgage Experts
Mobile: 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

 

7 Oct

Mortgages 101 – What You Need to Know about Mortgages

Mortgage

Posted by: Kelly Hudson

  Mortgage [ˈmôrɡij] NOUN

With a residential mortgage, a home buyer pledges his or her house to the bank. The bank has a claim on the house should the home buyer default on paying the mortgage. In the case of a foreclosure, the bank may evict the home’s occupants and sell the house, using the income from the sale to clear the mortgage debt.

Mortgages are complicated, but they don’t have to be… let me break down the basics for you.

Mortgages in a Nutshell

Since homes are expensive, a mortgage is a lending system that allows you to pay a small portion of a home’s cost (called the down payment) upfront, while a bank/lender loans you the rest of the money. You arrange to pay back the money that you borrowed, plus interest, over a set period of time (known as amortization), which can be as long as 30 years.

When you get a mortgage loan, you are called the mortgagor. The lender is called the mortgagee.

How Do You Get a Mortgage?

The companies that supply you with the funds that you need to buy your home are referred to as “lenders” which can include banks, credit unions, trust companies etc.

Mortgage lenders don’t lend hundreds of thousands of dollars to just anyone, which is why it’s so important to maintain your credit score. Your credit score is a primary way that lenders evaluate you as a reliable borrower – that is, someone who’s likely to pay back the money in full WITHOUT a lot of hassle. A score of 680-720 or higher generally indicates a positive financial history; a score below 680 could be detrimental, making you a higher risk.  Higher risk = higher rates!

For more information about Credit check out Solving the Puzzle – 5 factors used in determining your Credit Score

How Mortgages Are Structured

Down payment:   This is the money you must put down on a home to show a lender you have some stake in the home.  Ideally you want to make a 20% down payment of the price of the home (e.g., $60,000 on a $300,000 home), because this will allow you to avoid the extra cost of Mortgage Default Insurance which is mandatory with all down payments of less than 20%.  5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home

Every mortgage has three components: the principal, the interest, and the amortization period.

Mortgages are typically paid back gradually in the form of a monthly mortgage payment, which will be a combination of your paying back your principal plus interest.

  1. Principal: This is the amount of money that you are borrowing and must pay back.  This is the price of the home minus your down payment
    • taking the above example, purchase price $300,000 minus $60,000 down payment to get a mortgage (principal) of $240,000.
  1. Interest rate: Lenders don’t just loan you the money because they’re nice guys.  They want to make money off you, so you will be paying them back the original amount you borrowed (principal) plus interest—a percentage of the money you borrow.
    • The interest rate you get from the lender will vary based on:  property, lender, credit bureau, employment and your personal situation.
  1. Amortization means life of the mortgage, or how long the mortgage needs to be, in order to pay off the complete loan (principal) plus interest. Mortgage loans have different “amortizations,” the two most common terms are 25 & 30 years.
    • Within the life of the mortgage (amortization) you will have a Term. The length of time that the contract with your mortgage lender including interest rate is set up (typically 5 years). After your term completes, you can renew your mortgage with the same lender or move to a new lender.

When to Get a Mortgage

First Step:  connect with a Mortgage Broker for a mortgage before you start hunting for a home.  You need to know what you can afford – especially with all the new government regulations.

Ideally you need a mortgage pre-approval, which an in-depth process where a lender will check your credit report, credit score, debt-to-income ratio, loan-to-value ratio, and other aspects of your financial profile.

This serves two purposes:

  1. It will let you know the maximum purchase price of a home you can afford.
  2. A mortgage pre-approval shows home sellers and their realtors that you are serious about buying a home, which is particularly crucial in a hot housing market.

Another easy first step? Before you start browsing online listings or visiting open houses, plug your info into my online home affordability calculator, which will give you an idea of how much mortgage you can qualify for.

Types of Mortgages

How do you figure out which mortgage is right for you? Here are the 2 main types of home loans to consider:

  1. Fixed-rate mortgage:This is the most popular payment setup for a mortgage. A fixed mortgage interest rate is locked-in and will not increase for the term of the mortgage.
  2. Variable rate mortgage aka Adjustable Rate Mortgages (ARM) A variable mortgage interest rate is based on the Bank of Canada rate and can fluctuate based on market conditions and the Canadian economy. A mortgage loan with an interest rate that is subject to change and is not fixed at the same level for the life of the term. These types of mortgages usually start off with a lower interest rate but can subject the borrower to payment uncertainty.
  3. Check out my BLOG Fixed vs. Variable Rate Mortgages – Pros & Cons

How to Shop for a Mortgage?

Use a mortgage broker, a professional who works with many different lenders to find a mortgage that best suits the needs of the borrower.  BLOG What is the difference between a Mortgage Broker & a Mortgage Specialist (hint – specialists work for the bank)!!

I specialize in Mortgage Intelligence, educating people about mortgages, how they work and what lenders are looking for.  Everyone’s home purchasing situation is different, so working with me will give you a better sense of what mortgage options are available based on the 4 strategic priorities that every mortgage needs to balance:

  • lowest cost
  • lowest payment
  • maximum flexibility
  • lowest risk

Most Canadians are conditioned to think that the lowest interest rate means the best mortgage product. Although sometimes that is true, a mortgage is more than just an interest rate. You can save yourself a lot of money if you pay attention to the fine print, not just the rate.

Banks tend to concentrate on the 5 year fixed mortgage rate (since that’s the best option for them)… rates are important, however I look at the total cost of the mortgage.  I will advise & explain mortgage options, help you understand the implications of your choice and help you avoid the pitfalls of choosing a mortgage based on rates alone.

My services for a typical mortgage are FREE (I get a finder’s fee from the lender) and I help people save money.  I LOVE my job!

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com