10 Nov

What is Title Insurance? Why Do You Need It?

Mortgage

Posted by: Kelly Hudson

When you are buying a home, you need to make a lot of decisions in a short time.  Regardless of how prepared you are, there are a lot of moving parts and it can feel overwhelming.

When you use mortgage financing to purchase a Canadian residential property, your lender will almost always require you to buy title insurance to cover the original mortgage amount.

You will have a Title Insurance discussion with your lawyer or notary just before your mortgage finalizes, when you are signing your final mortgage documents.

In the past, lenders required clients to provide a survey certificate, which is more expensive (combined it with a lawyer’s opinion of title), which is more costly and is also getting harder to find these days.

  • If a copy of the survey was not available, clients would have to pay for a new survey to be done. In some communities, this could cost $1,000 or more.

Over the years, this requirement has changed. Now, most lenders in BC require title insurance for all properties in lieu of a survey certificate.

Title insurance is generally purchased at the time your mortgage closes. In BC, for purchases under $1 million, title insurance costs approximately $200-250.

  • You can purchase a personal portion of Buyers Title Insurance as well, to insure your title for the full amount of your purchase price, this will cost you about $150+ (for a $500,000 home).

Title Insurance is a one-time cost that is usually included in your final closing costs.

What is title insurance and why is it important?

Title insurance is designed to protect the lender (and you, should you buy the personal Buyer Title Insurance policy) against title fraud and potential defects relating to the title of your home.

Some of the risks that title insurance protects you against include:

  • Title insurance protects lenders (and buyers) from financial loss due to defects in a title to a property.
    • A one-time fee paid for title insurance covers pricey administrative fees for deep searches of title data to protect against claims for past occurrences.
  • An unforeseen defect in your title ownership.
  • Negligence or errors made by your lawyer relating to title risks.
  • The most common claims filed against a title are encumbrances or judgments against property including outstanding lawsuits, back taxes, unpaid utilities, mortgages, or condo/strata maintenance fees – these are known as liens.
  • Incorrect signatures on documents, as well as forgery and fraud
  • Survey or records errors.
  • A pre-existing outbuilding that must be removed because it encroaches on a neighbouring property.
  • The gap period between when a property purchase is finalized or closed and when the title is officially registered with the government.

If an innocent homeowner is defrauded through transfer of their title and the fraudster who then takes out a mortgage and takes off with the money, then the lender now bears the risk of loss. This could make the small cost of Title Insurance worth it for you in BC.

If you are considering the purchase or refinance of a home, consider title insurance.  Talk to your Real Estate lawyer/Notary to understand the benefits of Title Insurance for your situation.

Please Note:  Please not make any decisions about buying or making changes to your title insurance policy without obtaining advice from a lawyer. I can explain the concepts and highlight some key areas to consider, however my expertise is in mortgages. 😊

Mortgages are complicated… 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 Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009  

Kelly@KellyHudsonMortgages.com

www.KellyHudsonMortgages.com

13 Oct

Mortgage Penalties – Ouch… How Much??

Mortgage Tips

Posted by: Kelly Hudson

Buying a home is both exciting and nerve wracking!  Everyone’s home purchasing situation is different, based on the 4 strategic priorities that every mortgage needs to balance:

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

The details in the mortgage contract can far outweigh the rate being offered.

When looking at a mortgage – Interest rates are very important, but even more important are the terms of the mortgage contract.

When I talk to mortgage clients – I explain the terms of the mortgage including the penalties associated with breaking a mortgage prior to the maturity date.

No one signs a 5-year mortgage contract expecting to need to break their mortgage.

Regrettably, life happens and 60% of homeowners, break their mortgage before it matures! 

The penalty for breaking a fixed rate mortgage is usually the greater of 3-months’ interest, or the Interest Rate Differential (IRD)whichever is higher!!!

In some cases, when your mortgage is very close to maturity, the 3-month interest penalty will be higher, but otherwise the Interest Rate Differential (IRD) penalty tends to be much higher than 3-months interest.

Variable rate mortgages usually use the 3-month interest penalty.

  • Some variable mortgages offering lower rates, however, will use an IRD or, in some instances, are closed (you cannot break them) without a bona fide sale of the property.
  • This is also the case for some niche fixed rate mortgage products.

With the Interest Rate Differential (IRD) penalty, there can be vast differences from one lender to another.

The IRD penalty is typically based on 4 things:

  1. The principal balance of the mortgage at the time you break it.
  2. The difference in the interest rate of the original mortgage and the rate the lender WOULD charge for the term closest to the remaining time on the mortgage
    • i.e. if there are 21 months left on your mortgage, the lender will most likely use their 2-year term interest rate as the comparison rate.
  3. The number of months remaining in the mortgage term.
  4. The discount off the posted rate the lender gave you
    • i.e. posted rate for 5 year fixed 5.29% when you got your mortgage
      • The rate you got from the lender was 5.29% less 3.0% Discount = 2.29%
      • The lender will use the discounted 3.0% when calculating the IRD

Penalties for breaking your mortgage.  Please check out this GREAT 3 minute video from the Globe & Mail explaining how Banks calculate mortgage penalties for both Variable & Fixed mortgages and how banks squeeze even more money out of their clients by giving discounts off their inflated posted rates  VIDEO Drawing Conclusions: How much does it cost to break a mortgage?

Check out my BLOG Fixed vs. Variable Rate Mortgages – Pros & Cons

When mortgage shopping, you need to consider the interest rate, along with the terms of the mortgage including:

  • Confirm if there are prepayment privileges, or if it is a totally closed mortgage (except for a bona fide sale)
  • Pre-payment privileges (10%, 15%, or 20%)
    • Can you prepay throughout the year OR only on the anniversary date of your mortgage? Miss the anniversary date… too bad… so sad!
  • How your lender calculates their Interest Rate Differential (IRD) penalties when breaking a mortgage

More information about mortgage penalties

·        Bank charges $30,000 mortgage penalty to woman forced to sell home due to pandemic June 1, 2020

·        When it comes to mortgage break penalties, big banks are often the worst Globe & Mail Nov. 14, 2019

  • Variable – 3 months interest approximately 0.5-1% of outstanding balance
  • Fixed – Interest Rate Differential (IRD) – Banks/Credit Unions as much as 4-5% of outstanding balance based on their (inflated) posted rates

When you get a mortgage, no one thinks about breaking a mortgage and the penalties.  Being educated about all aspects of a mortgage, can make a huge difference to your bottom line.

Let’s have a chat and find 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

9 Sep

6 Tips for Success on Multiple Offer Home Purchases

Mortgage

Posted by: Kelly Hudson

The real estate market in Vancouver and Toronto is once again on a rampage!

There is low home inventory levels and historically low interest rates, making newly-listed homes sell quickly! Many homes are receiving multiple purchase offers, which is excellent news for sellers

not such good news for buyers.

As a home buyer, you need to be prepared!!

Buying a home is exciting, but having to compete for a home on which there are multiple offers increases a home buyers stress level. During multiple offer situations, the seller has no obligation to accept or negotiate any of the offers. Moreover, the seller has the liberty to choose the best offer to negotiate and they will accept the one that best reflects their needs.

While price it is important, it may not be the only factor sellers consider. Other factors they will look at include subject conditions and completion and possession dates.

Six tips for going into multiple offer situations 

1.   Work with a Mortgage Broker to Get Pre-Approved, versus Pre-Qualified

So you’ve gone into the bank and after a couple of questions they tell you are Pre-Approved… If you haven’t provided any documentation or run your credit – you’ve probably got a rate hold.

An important aspect of buying a home is knowing how much you can afford. Work with your Mortgage Broker to determine what you are comfortable paying on a monthly basis fits your budget. Make sure you know the highest amount you can offer. 

Pre-approved for a Mortgage Nov15There are major differences between pre-qualification and pre-approval   

  • First we must understand the concept of pre-qualification. When a bank takes a quick look at a buyer’s overall financial picture based on what the buyer tells them, they may look at the buyer’s credit bureau to make sure their credit scores are in line with the current mortgage guidelines.
  • A pre-approval is more involved. Here you will work with your Mortgage Broker to gather all the mortgage documentation up front, so everything is ready to go when it comes time to make an offer on a home.
  • Once you make an offer, time will be of the essence. You don’t want the added stress of collecting documents while negotiating and during the subject condition period.
  • Getting a pre-approval includes such things as: pulling your credit bureau, collecting tax returns (NOA’s), T-4’s, pay stubs, bank statements (to prove down payment), assets, liabilities, employment status, income, gifted down payments, any other properties you own, etc.
  • Pre-approvals are still subject to the lender approving the property (including strata docs for condo’s & townhouses) along with an appraisal being done on the subject property to determine current value. Appraisers are the bank’s eyes on the property you are buying, therefore lenders will only accept appraisers on their approved list. Appraisals can be a problem if you have reached your down payment limit and the price you paid for the property cannot be supported by the lender’s appraiser.

In a multiple-offer situation, having a Pre-Approval Certificate is extremely important and often helps the seller choose who they want to work with. 

2.   Engage an experienced Real Estate Agent 

Having the right Realtor can be critical to your interests. Your agent should be very experienced in working with Multiple Offers. Make sure they know and respect your spending limit.

  • Ask your Realtor to respectfully request if they could be notified if you are close in the bidding and would you have a chance to sweeten your offer? You never know until you ask.
  • Once you set your budget, stick to it! Determine exactly how much you can afford if you end up in a multiple offer scenario. A reputable agent won’t try to upsell you and/or encourage you to go above your budget. They will research comparable properties in the area and advise you. 

3.   Consider doing a home inspection ahead of time

Do everything possible to arrange for a pre-inspection of the property. It shows the seller that you are serious about purchasing. The seller may consider your offer more readily if it doesn’t include a “subject to inspection” clause. It is inadvisable to buy a property without a home inspection; it could cost you in many ways down the road. 

4.   Be very flexible 

Winning in a multiple offer situation is sometimes as easy as agreeing to certain seller conditions such as: closing dates, purchasing a property “as is” or even tightening the subject removal dates. 

Have your Realtor ask the seller’s Realtor for ideal closing dates. This may be important to the seller if they have already bought another property and want to move ASAP or if they want to remain in the home and rent back for a few months. Try to have as many of the seller’s preferences as possible satisfied when making your own offer. Being flexible and trying to make the transaction as easy as possible for the seller could win over a higher-dollar offer.   

5.   Write a letter 

You may wish to draft a personal letter (including a family picture) or even make a video for the sellers explaining how much you love their home and would like to raise your family there. It creates an emotional connection. Buying and selling a home is an emotional time for everyone, especially if the seller has lived there for a long time raising their own family. Sometimes, it’s not about the highest offer; some sellers might feel a strong connection to you and your family and decide they want to sell to someone who will really appreciate their home. 

6.   Know when it’s time to “Just Say No!” 

Multiple offer situations are stressful. You need to know what you can afford to spend and stick to your budget. Remember it’s your money and your life, so you get to make the final decision. 

Purchasing a home is not just about being smart, it is also about being comfortable regarding the decision you made. You need to find a home that will be a great place to create wonderful memories and start building equity. 

Any questions?  Give me a call!

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

18 Aug

Home Equity Line of Credit (HELOC) – Good or Bad??? Mostly it depends on your financial discipline …

Mortgage

Posted by: Kelly Hudson

More and more Canadians are using the equity in their homes as an ATM. The most common options are Lines of Credit (LOC) and Home Equity Line of Credit (HELOC)

Line of Credit 

A line of credit is an agreement by a financial institution (lender) to loan money to a borrower up to an agreed upon maximum. Interest is charged on the money that is withdrawn from the line of credit. i.e. if you have a Line of Credit for $10,000 and have borrowed $1,000 you only pay interest on the amount of money you have borrowed. 

Typical rates for a LOC are Prime plus 2-4%

The actual rate available to a borrower will vary depending upon several factors including:

  • general credit worthiness
  • security/collateral provided
  • borrowing/repayment history
  • employment
  • other products/services with that lender

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a secured form of credit. The lender uses your home as a guarantee that you’ll pay back the money you borrow.  A HELOC resembles a second mortgage but functions like a credit card.

A home equity line of credit (HELOC) is a form of loan that lets you borrow money against the equity in your home. Unlike a traditional mortgage, most HELOC’s are not constructed to fit a pre-determined amortization, although regular, interest payments are required by most lenders.

HELOC borrowers should recognize that, over time, these products can also significantly add to consumer debt loads, since the revolving nature of HELOCs can also lead to greater persistence of outstanding balances.

  • Financially disciplined borrowers elect to repay their outstanding HELOC balances over a shorter period relative to the average amortization of a typical traditional mortgage.

A HELOC can be a worthwhile investment when you use it to improve the value of your home. However, when you use it to pay for things that are otherwise not affordable with your income or savings, it can cause problems for people who lack financial discipline, become a bad debt.

Typical HELOC rates are Prime + .50-1% (depending on your agreement, your lender may be able to change the rate at anytime)

People choose HELOCs primarily for three reasons:

  1. They want a cheap source of readily available cash, should they need if for renovations, investing, education, emergencies, or personal use.
  2. They want an interest-only payment (the lowest payment you can get since you don’t have to pay off any principle).
  3. They want a mortgage with no penalty if they make big prepayments i.e. sell their home or change lenders.

Calculating a Home Equity Line of Credit (HELOC)

As per the Office of the Superintendent of Financial Institutions (OSFI), a HELOC can give you access to a maximum of 65% of the value of your home.

  • If you have a mortgage, your mortgage loan balance + your HELOC cannot equal more than 80% of your home’s value. (i.e. 65% HELOC + 15% mortgage = 80%)

HELOCs have a few disadvantages:

  • Your interest costs can soar when interest rates increase.
  • The revolving nature of a HELOC makes it very easy to get into debt and stay in debt if you are not financially self-controlled.
  • Making just interest-only payments can keep you indebted for many years beyond a traditional mortgage, since you do not have to make payments on the principle of the loan.

More information regarding HELOC’s:

  • 22% of borrowers get HELOC’s (source: CAAMP).
  • In 2014 the average HELOC was approved for $135,000 (source: CAAMP).
  • 9% of HELOC borrowers max them out
    • that includes people who use them as mortgage substitutes (source: CAAMP).
  • Most HELOC’s are collateral charges, which means you usually must pay legal or appraisal fees to change lenders.
  • HELOC’s can have two types of payments, depending on the lender:
    • Floating payments: This is where your payments increase, and decrease based on a benchmark of some sort (most commonly prime rate).
    • Fixed payments: This is where the lender keeps your payment the same for the entire term. If prime rate goes up, you pay more interest and less principal, and vice versa. In most cases, your payment must at least cover the interest due—or the lender will raise the payment.

The biggest challenge with using a HELOC instead of a mortgage, is that most people pay the interest only. By paying interest only, you have the lowest payment, BUT then “life happens” and you do not put any money on the principle to lower your debt.

With a traditional mortgage you pay both principle and interest, so every payment you make lowers your principle, and ultimately you pay off your mortgage.

HELOC’s are inherently riskier products, given their revolving nature and persistence of debt balances.

Using a home equity line of credit HELOC to buy your home.

While home equity lines of credit can provide people with low interest rates and flexible lending terms, “there’s more to this arrangement than meets the eye,”

Buying a house with a home equity line of credit has benefits that a mortgage doesn’t offer.

  • No prepayment penalty: The payment schedule on a line of credit is more flexible, so you can pay your mortgage off without incurring penalty fees. With a traditional mortgage, you may incur fees when you pay more than a certain percentage of the loan amount.
  • Readvancable: when you pay down the HELOC you can borrow the money again and again.

There are approximately 3 million HELOC accounts in Canada with an average outstanding balance of $70,000

Can you pass the HELOC knowledge test?

Despite Canadians’ confidence in their knowledge about how their secured line of credit works, the majority seemed fuzzy on the details.  When you use your home as collateral, the bank has legal rights to your property, and you cannot close on a sale of that home without paying back that loan.

For example, of those who said they did have a home equity line of credit:

  • 57% did not know that when you take out a HELOC the financial institution lending the money puts a mortgage on the borrower’s home.
  • 58% did not know that taking out a HELOC when they already have a mortgage on their home means that the lending institution places a second mortgage on the home, OR modifies the original mortgage to capture all the equity in the home;
  • 69% did not know that having a HELOC could negatively affect their credit rating or future loan applications.
  • 83% of survey respondents did not know that when they pay off and close their home equity line of credit, any credit card consolidated under this line of credit may be cancelled and not available for future use.
  • 62% did not know that having a home equity line of credit could negatively impact their ability to take out a loan or mortgage with another financial institution.
  • 58% did not know that when they take out a line of credit, their home becomes the bank’s security for any credit card debt, other loans they have with that bank, or any other loans they have co-signed.

HELOC’s for some can be a dangerous trap because they tend to spur people to spend more, which leaves them with more combined debt than someone without a HELOC.

Without understanding all the implications of this type of borrowing, consumers could risk their future credit or run into issues when they sell or refinance their home.

Here are a couple articles that may answer some of additional questions (or create some new questions!!) regarding HELOC’s.

·        Borrowing against home equity

·        Home Equity Loans: What You Need to Know

Let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Broker
Canadian Mortgage Experts
604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

22 Jul

Can You Port Your Mortgage??? Maybe… Maybe Not!

Mortgage

Posted by: Kelly Hudson

What is Porting a Mortgage? 

Porting is when you move your mortgage from your current property to a new property.

People do it when they buy a new home, want to preserve their current interest rate, OR avoid a penalty for breaking the mortgage early.  BLOG Mortgage Penalties – Ouch… How Much??

What many people don’t realize is that if you decide to port your mortgage, it is like starting from the square 1 on your mortgage. It requires a complete re-qualification for everyone on the mortgage, meaning a whole new application, all new employment documentation, a fresh credit check and a new appraisal.

Your mortgage is portable, right?

Most lenders claim their mortgages are portable, however porting is so complex these days that it has become one of the more over-rated mortgage features.

Let me explain:

  1. You don’t have enough income to qualify for the mortgage
    • If you don’t have enough provable income (i.e. your income has fallen since you last got approved), you could have a problem.
    • If you become self-employed after your mortgage funds, but don’t have the required two years of tax returns showing sufficient earnings. BLOG Self Employed??  Here’s What You Need to Know About Mortgages
  2. Your debt ratios are too high (you’re spending too much of your income on mortgage & debts)
    • If your monthly debt load and housing obligations have grown too large (more of your gross monthly income is needed to finance your home & debts), you’ll be declined.
      • In January 2018 the federal government implemented a Stress Test. Whichever is the highest is how you must qualify for a mortgage.
      • Qualify at the Chartered Bank Benchmark Rate (Government Rate) which fluctuates (currently 4.94%).
      • OR the contract rate your lender gives you PLUS 2% i.e. 2.99% + 2% = 4.99%
        • Since 4.99% is the highest – that would be the stress tested rate.
    • If you have to qualify for a mortgage at a rate about 2% higher than the lender is giving you, your buying power decreases by about 20%.
  3. The new home purchase date doesn’t match up with the selling of your current home
    • If the purchase of your new home closes after the lender’s porting deadline.
      • Typically, Lenders allow 30-90 days to port your mortgage from Property A to Property B (a few allow up to 365 days).
      • It can be difficult to get the closing dates of your current and new home to fall within porting deadline.
  4. Your new property doesn’t qualify
    • Lender may LOVE you, but they need to LOVE the new property as well.
    • Many lenders have changed criteria on investment, leasehold, age-restricted, remediated grow-op properties, building flaws, co-ops, etc.
  5. Your credit score has fallen
    • The lender will look at your current credit score.  If you no longer meet the lender’s minimum credit score (typically 680+), porting your mortgage may not be an option.
      • OR if the lender allows you to port, you will pay a higher interest rate.
  6. You need more money
    • If you are upgrading your home, you will probably need a bigger mortgage.
    • Some lenders will only port the exact same dollar amount.
      • That means you may have to come up with the difference if you buy a more expensive home, or break your current mortgage.
    • Please note that for lenders that allow a bigger mortgage, applying for more money while porting (a.k.a., a “port and increase”) could reduce your negotiating power because the existing lender knows you don’t want to pay a penalty to leave.
      • Your current lender does not have to be competitive, since you are “stuck with them” so you don’t want to pay the penalty for breaking your mortgage.
  7. You’ve got a variable-rate mortgage
    • Your lender may not port its variable-rate mortgages (many don’t), you may have to break it and pay a penalty.
      • Some lenders will require you to convert your variable mortgage to a fixed rate before porting… typically you wouldn’t get the best rate.
      • If your mortgage has a home equity line of credit (HELOC) component, note that some lenders refuse to port HELOCs.
  8. You can’t get bridge financing
    • If your take possession of your new property before the sale completes on your old property, you need to “bridge” the down payment until you get the cash from your sale.
      • The problem is, not all lenders offer bridge financing. If yours doesn’t, and you need it, and you can’t get it elsewhere, you may have to break the mortgage.
  9. The property is outside the lending area
    • Some lenders have very restrictive lending areas.
      • i.e. If you’re with a credit union, you generally can’t port out of the province.
      • Many other smaller lenders have restrictions on rural properties, especially if the mortgage is not mortgage default insured.
  10. You want to keep your current maturity date
    • Some lenders require you to get a brand new 5-year term when you “port” your mortgage to a new property.
      • A 5-year term “could” lock you in longer than you’d prefer at a worse rate than you like.

Forewarned is forearmed. Understanding the pros & cons of mortgage portability can save you a lot of stress.

The bottom line:  Mortgages are portable (in theory).  However, in practice over 60% of people can not port their mortgage.

Any questions?  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

 

15 Jun

Everything You Need to Know about Mortgage Default Insurance

First Time Home Buyer

Posted by: Kelly Hudson

Home buyers say the #1 obstacle to home ownership is saving enough for a down payment.

When you buy a home, your best option is a 20% or higher down payment. For many Canadians, a 20% down payment is not affordable.

What can you do if you don’t have the cash for such a big down payment? You can apply for mortgage default insurance.

How much money do you need for a down payment?  

The minimum amount you’ll need for your down payment based on the purchase price of your home
Purchase price of your home      Minimum amount of down payment
$500,000 or less
  • 5% of the purchase price
$500,000 to $999,999
  • 5% of the first $500,000 of the purchase price
  • 10% for the portion of the purchase price above $500,000
$1 million or more
  • 20% of the purchase price

In Canada, mortgage insurance is required federally on high-ratio mortgages (a down payment of less than 20%). This insurance, which protects the bank/lender in case the borrower defaults, gives lenders the flexibility to offer home buyers with low down payments the same low interest rates they would offer to home buyers with bigger down payments.

In Canada there are only three Canadian mortgage default insurance providers: Canadian Mortgage & Housing Corp. (CMHC), Genworth and Canada Guaranty They all have the same sliding scale, the larger your down payment the less insurance you pay.

CMHC is a federal Crown corporation, while both Genworth and Canada Guaranty are private insurers.

As a borrower, your lender selects the mortgage insurer, not you. Each mortgage insurer has their own criteria for evaluating the borrower and the property, and they decide whether or not your mortgage can be insured. Therefore, it’s possible that your lender may approve your mortgage application, but the mortgage insurer won’t. In that case, you won’t be able to get a mortgage unless your lender decides to try another insurer. Since there are only 3 insurers in Canada – 3 strikes and you’re out!  

How Mortgage Default Insurance works:

Mortgage insurance premiums are based on the amount of the mortgage. The smaller your down payment, the more expensive the mortgage default insurance. The premium is generally rolled into the mortgage but can be paid upfront as part of the closing costs.

  • If the insurance premium is added to the mortgage amount, then you pay interest on the total amount borrowed, including the mortgage default insurance premium.
Down Payment Premium on Total Loan
15% – 19.99% 2.80%
10% – 14.99% 3.10%
5% – 9.99% 4.00%

If you stop making payments, the mortgage default insurer would protect your lender from financial losses. If you have mortgage insurance for the property, the lender can make a claim against the policy and the mortgage insurer will pay the lender.  However you are still responsible for repaying any balance remaining to the insurer.

In other words, if the sale of the property isn’t enough to cover the balance of the mortgage owing to the lender, you don’t get off scot-free, your lender or insurer are able to come after you personally for the remainder of the balance.

Mortgage Default Insurance Exceptions:

  • Investment properties are not eligible for mortgage insurance; consequently, you will need a minimum 20% down payment to buy.
  • The longest amortization period for an insured mortgage is 25 years.
  • Homes over $1 million are not eligible.
  • Even if you have more than a 20% down payment, there are some situations when your lender may require you to get mortgage insurance (depending on the location, type of property, etc.).

Why is mortgage default insurance necessary?

Mortgage default insurance offers a benefit to the home buyer. Without mortgage default insurance, lenders would charge much higher interest rates, since you are higher risk than someone with more than 20% down payment. Even though you pay mortgage default insurance, you benefit from paying less interest on the total mortgage amount.

When you buy a home, your best results will come when have a minimum 20% down payment, check out my BLOG 5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home

If you can’t save a 20% down payment, then mortgage default insurance could allow you to buy your home.

Would you like more information regarding mortgage default insurance?

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

11 Mar

4½ Types of Home Ownership – Freehold, Leasehold, Strata or Cooperative

Home Ownership

Posted by: Kelly Hudson

In general, there are four common types of property ownership in Canada: Freehold, Strata, Co-Operative and Leasehold with advantages and disadvantages to each of the type.  Therefore it’s important for home buyers to know the differences between the different types of property ownership when they’re shopping for a new home.

Freehold Property Ownership Freehold is the most common type of property ownership in Canada.

It’s what we traditionally think of as property ownership; you own the building and the land it sits upon.  A freehold interest (also known as a fee simple) is the more precise term for what we ordinarily refer to as “ownership” of a home

You own the building and grounds it rests upon for an indefinite period of time and have full use and control of the land and buildings on it, subject to any rights of the Crown, local land use bylaws and any other restrictions in place at the time of purchase.  You have the freedom to make changes to building and yard (subject to zoning, bylaws and permit limitations) and are responsible for cost and maintenance.

Most single-family homes are freehold.

Strata Property Ownership Most condo and townhouse developments are strata properties. Single-family detached home strata properties are rare, but they do exist.

When you buy a strata property, you have strata title with full ownership of all the interior elements of your unit, you also share ownership of common property that exists within the strata. Oftentimes this shared common property includes parking, hallways, amenity rooms, gym space, laneways, and the building’s entrances and exits.

As a strata owner, you are responsible for the maintenance and upkeep of your unit but the costs of looking after the common property are covered by monthly fees charged to every owner.

These strata/condo fees are proportional to the size of your unit; if you own a large two-bedroom unit you’ll pay more than someone living in a small bachelor suite.

As strata properties are comprised of a number of people sharing common spaces, there are rules and bylaws that govern how those spaces can be used. There may also be rules that regulate what you can do in your own private space so it doesn’t have an adverse impact on your neighbours, or the common spaces owned by everyone.

These rules are set by a council of owners that is elected by owners in the strata. The council is also responsible for the strata corporation that is set up to administer the strata. They set budgets, hire contractors, adhere to maintenance schedules, get repairs done, deal with complaints and infractions of the rules and bylaws.

 Co-op Property Ownership is similar to owning a unit in a strata.

In the cooperative form of ownership, each owner owns a share in a company or cooperative association which, in turn, owns a property containing a number of housing units. Each shareholder is assigned one particular unit in which to reside.

But instead of owning the interior of your own unit and sharing ownership of common property, owners in a co-op each own a share of the corporation that actually owns the building or complex. That share ownership then gives you the right to occupy a unit within the co-op, provided you don’t break any of the co-op’s rules and you pay your housing charges on time.

As you are not buying into the actual real estate when you purchase a co-op, you’ll require a different kind of financing from your lender called a share loan.  It works much like a mortgage except your share in the co-op is the loan’s collateral, instead of the property.

Like a strata, all owners in a co-op share the expense of repairs and maintenance through monthly fees.

Owners in a co-op must follow rules and regulations set and administered by a co-op board which is elected by members of the co-op.  The co-op board also has the power to approve or reject prospective new members, which must comply with provincial human rights legislation.

Leasehold Property Ownership You would own the actual building or unit, but would rent or lease the land itself for a set period of time and there are varying lease terms.

Living in a leasehold property is like living on borrowed time.  Leasehold interests are frequently set for periods of 99 years, but regardless of the length of the original term, you will only be able to purchase the remaining portion. Of course, the shorter the remaining portion, the less you, or the person who eventually purchases from you, will be willing to pay for the leasehold interest.

When you buy a leasehold property, you own the building but the property on which your home sits is owned by somebody else who has leased it back to a builder or developer. Typically, those leases last for 99 years. When the lease expires, the property’s owner could choose to renegotiate the lease to current market rates. Or they could reclaim the property as their own for redevelopment after buying out owners at fair market value.

There are 3 types of leased land: government (federal, provincial or municipal), First Nation reserve land and private companies/individuals can also own leasehold land.

Most developers prepay the cost of leasing the land, then incorporate that into the selling price of their projects. If they didn’t do that, then you’ll be paying rent on top of your mortgage payments, strata fees and taxes. And you won’t be protected from periodic adjustments to reflect the current value of the land.

While most properties appreciate over time, a leasehold property can actually depreciate, especially as the lease gets close to expiring. That uncertainty over a property owner’s future plans for their property can make it more difficult to get financing for a leasehold property. The lender could require a larger down payment, or it could be amortized over a shorter period of time.

Despite their uncertainty, leasehold properties can be a good option for property ownership, especially if they’re still early in the lease period. They can be cheaper than freehold properties or offer better value in desirable neighbourhoods. But the uncertainty that comes with leasehold can make them a poorer investment than other types of property ownership.

Leasehold interests can become particularly risky real estate investments as they approach the end of their lease, as the owner of the property can choose to resell the leasehold interest, redevelop the land entirely, or leave the area vacant.

Before you put too much effort in buying leasehold, find out how long the head lease is; most Financial Institutions require it be a minimum of 5 years longer than the amortization of the mortgage loan.

Co-owning a Property – There is another option for property ownership, called co-owning. It is becoming a viable option for some families who’ve been priced out of owning a home.

Co-ownership is when two or more owners enter into a legal agreement to own a single piece of property. Usually co-ownership involves family members, such as parents and grown offspring, who may share the same home or live autonomously in separate dwellings like a house and laneway house.

Co-ownership agreements are complex documents, with plenty of legal protections to safeguard both parties in the agreement as well as the lender financing the mortgage. If co-ownership is an option, you need to engage a lawyer experienced in constructing such agreements.

Information on obtaining a mortgage for Leasehold or Cooperative Ownership 

Typically, you will find your Mortgage Lender more cautious about financing Leasehold and Cooperative property as they are considered a riskier type of collateral and may come with a higher mortgage interest rate and/or higher down-payment.

Speak to your Mortgage Broker to obtain more information.

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

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