31 Aug

WHY BANKS WANT YOU TO SIGN THE RENEWAL AGREEMENT THAT THEY MAIL OUT TO YOU

General

Posted by: Robert McCaw

Why banks want you to sign the renewal agreement that they mail out to youMost banks boast a higher than 90% renewal rate on their mortgages (some even higher than 95%). Since it costs them a lot more money to acquire a new client versus keeping an existing one, banks love the savings of a simple renewal. So you would think that they would offer you the best rate up front on your renewal as it’ll save them money in the long run? Well…not necessarily.

With renewal rates being as high as they are, there is not much incentive for banks to give their clients the best rates up front. They know that most people will stay as they know it’s easier to just sign a form as opposed to applying for a mortgage at another bank. Therefore, the dreaded renewal letter that gets mailed out automatically prior to your renewal date.  They sometimes call this the convenience fee, they send you the mortgage renewal papers, you sign it and send it back, but they sometimes charge you somewhere between 0.5 and 1% higher rate.

The banks would love nothing more than for you to just pick the term, sign the document, and send it back to them. It costs them relatively little to process it and they don’t have to follow up with you after that (other than sending you a new copy of the agreement).

Since the renewal documents are printed automatically (and yes they may include a “preferred rate” which makes it even more tempting to sign) they don’t factor in any rate specials that may occur after they’re printed.

Recently a client’s mortgage was coming up for renewal and they received the automatic renewal letter. Just calling the 1-800 number saved them an extra .10%, which on a $500,000 mortgage was an extra $500 per year in interest. Not bad for a 5 min phone call.

There are also some important questions to answer:

 -are you planning on selling your home anytime over the next 5 years?

 -do you need to access any equity from your home for renovations, children’s education, etc.

 -what are your long term goals with the property?

These are important questions to ask as they help us suggest the right product for you.

So it’s important to treat your renewal as if you’re obtaining a new mortgage and spend some time researching your options. When I worked at the bank I was always shocked at the number of people that just signed the form and sent it back. That’s why (in addition to the financial institution where your mortgage is now) you need to contact your Dominion Lending Centres Mortgage Broker and have them give you an unbiased view of which mortgage product is right for you, as they have access to hundreds of different financial institutions.

27 Aug

AN INTERESTING MOVE REGARDING RENTAL PROPERTY FINANCING

General

Posted by: Robert McCaw

For those looking to purchase rental properties, the minimum down payment has historically been at 20%, and so it remains. In past years, this down payment money had to be proven that it was from the buyers own resources, it could not be gifted.

In the case of an owner occupied purchase, the down payment can be (and often is) gifted from a directly related family member.

The big news from one of our key lenders at the start of July was an announcement that they would now allow gifted down payment (only from a related family member) to be applied to rental property purchases as well.

The credit score is a key focus with applicants scoring 740 and higher being eligible for 80% financing on investment properties with no mortgage insurance premium, no fees, and no higher than market rates.

For those with a credit score below 740, the down payment must be increased to 25% in order to avoid the mortgage insurance premium, although if the client opts to pay the mortgage insurance premium, then 80% financing is possible.

The 740 credit score relates only to the down payment amount, even for clients with a score under 740 the gifted option remains available.

This is a program designed to enable the smaller investor to pool resources with other family members and get into the Real Estate market. It opens the door of opportunity for many who have otherwise been locked out of buying additional properties.

26 Aug

BEWARE OF EARLY DISCHARGE PENALTIES!

General

Posted by: Robert McCaw

Have you ever needed to get out of your mortgage before the maturity date? It can be a confusing and surprising experience. Don’t forget that your mortgage is a legal contract, therefore, like most contracts it is expected that it would cost you to break it.

The lending institution will have two options to determine how much you will pay, but first they will consider the type of mortgage term you have. Is it a variable rate or a fixed rate? If it’s a variable rate, you most likely will pay three months interest max, but if your term is fixed, you will pay either the Interest Rate Differential (IRD) or three months interest, WHICH EVER IS GREATER.

Three Months Interest Penalty

Determining how much three months interest will cost you is usually pretty simple; take the remaining mortgage balance, multiply by the interest rate, divide by 365 to get the daily amount, then multiply by 90 (for three months) and you got it. Of course, you must verify your figures with your financial institution, but you get the picture.  Or look back through your paperwork to fine your amortization schedule, if that can’t be found call your mortgage broker, he/she will have a copy.

Interest Rate Differential

IRD is more complex. In simple terms, the financial institution wants you to pay them back for the loss in revenue that they may experience when you pay out the mortgage early. So if you have two years left on your mortgage, and they can’t loan out the same funds for at least the interest rate you are paying they will want to be compensated for their loss.

For example; if your current rate is 5% but they can currently can only loan out those same dollars at 3%, they will want you to pay them the 2% loss.

With me so far? Here it comes…

Say your rate of 5% was a discounted rate at the time received, most are, and the posted rate at the time was actually 7%, the financial institution may actually charge you the difference between the 7% and the current 3%, or something even more complicated. There could be a difference of thousands of dollars!

Most banks and financial institutions have different ways of calculating their early discharge penalties, therefore, it is imperative that you find out how they will calculate this penalty upfront before you initially sign for your mortgage, especially if you think you might need to get out early.

A mortgage specialist will take a financial planning approach to sourcing your mortgage options and will help you throughout your decision making progress, making sure that you not only consider your current situation but make sure you look at future scenarios as well.

The good news is that we have access to lenders who will calculate your penalty using your discounted interest rate against the current discounted rate when calculating the penalty.

If you are considering paying out your mortgage early, it is vital that you contact your mortgage specialist or financial institution to obtain a written calculation on how this penalty will be calculated before finalizing your plans. Knowing the costs prior to making the final decision on a house sale/purchase or early discharge can save you thousands of dollars and a lot of stress!

Better to know up front, than being surprised later!

 

24 Aug

THE 10 DON’TS OF MORTGAGE CLOSING

General

Posted by: Robert McCaw

 

 Okay, so here we are… we have worked together to secure financing for your mortgage. You are getting a great rate, favourable terms that meet your mortgage goals, the lender is satisfied with all the supporting documents, we are broker complete, and the only thing left to do is wait for the day the lawyers advance the funds for the mortgage.

Here is a list of things you should NEVER do in the time between your financing complete date (when everything is setup and looks good) and your closing date (the day the lender actually advances funds).

NEVER MAKE CHANGES TO YOUR FINANCIAL SITUATION WITHOUT FIRST CONSULTING ME. CHANGES TO YOUR FINANCIAL SITUATION BEFORE YOUR MORTGAGE CLOSES COULD ACTUALLY CAUSE YOUR MORTGAGE TO BE DECLINED.

Here are the 10 Don’ts of Mortgage Closing… inspired by real life situations.

1. Don’t quit your job.

This might sound obvious, but if you quit your job we will have to report this change in employment status to the lender. From there you will be required to support your mortgage application with your new employment details. Even if you have taken on a new job that pays twice as much in the same industry, there still might be a probationary period and the lender might not feel comfortable with proceeding.

If you are thinking of making changes to your employment status… contact me first, it might be alright to proceed, but then again it might not be, it is just best to wait until your mortgage closes! Let’s talk it out.

2. Don’t do anything that would reduce your income.

Kind of like point one, don’t change your status at your existing employer. Getting a raise is fine, but dropping from Full Time to Part Time status is not a good idea. The reduced income will change your debt service ratios on your application and you might not qualify.

3. Don’t apply for new credit.

I realize that you are excited to get your new house, especially if this is your first house, however now is not a good time to go shopping on credit or take out new credit cards. So if you find yourself at the Brick, shopping for new furniture and they want you to finance your purchase right now… don’t. By applying for new credit and taking out new credit, you can jeopardize your mortgage.

4. Don’t get rid of existing credit.

Okay, in the same way that it’s not a good idea to take on new credit, it’s best not to close any existing credit either. The lender has agreed to lend you the money for a mortgage based on your current financial situation and this includes the strength of your credit profile. Mortgage lenders and insurers have a minimum credit profile required to lend you money. If you close active accounts, you could fall into an unacceptable credit situation.

5. Don’t co-sign for a loan or mortgage for someone else.

You may have the best intentions in the world, but if you co-sign for any type of debt for someone else, you are 100% responsible for the full payments incurred on that loan. This extra debt is added to your expenses and may throw your ratios out of line.

6. Don’t stop paying your bills.

Although this is still good advice for people purchasing homes, it is more often an issue in a refinance situation. If we are just waiting on the proceeds of a refinance in order to consolidate some of your debts, you must continue making your payments as scheduled. If you choose not to make your payments, it will reflect on your credit bureau and it could impact your ability to get your mortgage. Best advice is to continue making all your payments until the refinance has gone through and your balances have been brought to zero.

7. Don’t spend your closing costs.

Typically the lender wants to see you with 1.5% of the purchase price saved up to cover closing costs… this money is used to cover the expense of closing your mortgage, like paying your lawyer for their services. You might think that because you shouldn’t take out new credit to buy furniture, you can use this money instead. Bad idea. If you don’t pay the lawyer… you aren’t getting your house, and the furniture will have to be delivered curb side. And it’s cold in Canada!

8. Don’t change your real estate purchase contract.

Often times when you are purchasing a property there will be things that show up after the fact on an inspection and you might want to make changes to the contract. Although not a huge deal, it can make a difference for financing. So if financing is complete, it is best practice to check with me before you go and make any changes to the purchase contract.

9. Don’t list your property for sale.

If we have set up a refinance for your property and your goal is to eventually sell it… wait until the funds have been advanced before listing it. Why would a lender want to lend you money on a mortgage when you are clearly going to sell right away (even if we arranged a short term)?

10. Don’t accept unsolicited mortgage advice from unlicensed or unqualified individuals.

Although this point is least likely to impact the approval of your mortgage status, it is frustrating when people, who don’t have the first clue about your unique situation, give you unsolicited advice about what you should do with your mortgage, making you second guess yourself.

Now, if you have any questions at all, I am more than happy to discuss them with you. I am a mortgage professional and I help my Dominion Lending Centres clients finance property every day. I know the unique in’s and out’s, do’s and don’ts of mortgages. Placing a lot of value on unsolicited mortgage advice from a non-licensed person doesn’t make a lot of sense and might lead you to make some of the mistakes as listed in the 9 previous points!

SO IN SUMMARY, THE ONLY THING YOU SHOULD DO WHILE YOU ARE WAITING FOR THE ADVANCE OF YOUR MORTGAGE FUNDS IS TO CONTINUE LIVING YOUR LIFE LIKE YOU HAVE BEEN LIVING IT! KEEP GOING TO WORK AND PAYING YOUR BILLS ON TIME!

Now… what about after your mortgage has funded?

You are now free to do whatever you like! Go ahead… quit your job, go to part time status, apply for new credit to buy a couch and 78″ TV, close your credit cards, co-sign for a mortgage, sell your place, or soak in as much unsolicited advice as you want! It’s up to you!

But just make sure your mortgage has funded first.

Also it is good to note, if you do quit your job, make sure you have enough cash on hand to continue making your mortgage payments! The funny thing about mortgages is, if you don’t make your payments, the lender will take your property and sell it to someone else and you will be left on that curbside couch.

Obviously, if you have any questions, please get in touch with us here at the McCaw Mortgage Team, 613 354-9037