The benefits of mortgage default insurance

In Canada, there are two different products commonly referred to as mortgage insurance. One is mortgage creditor insurance, which continues to pay your mortgage payments in the event of death or disability. But the other type of insurance--mortgage default insurance--also offers important benefits.

If you're buying a home and borrowing more than 80% of its value, your mortgage is required to be covered by default insurance. This insurance protects lenders from loss in case a loan isn't repaid. With this protection, lenders are willing to offer loans with very low down payments--as little as 5% of the loan amount.

For loans without default insurance, most lenders require a down payment of 20%, which is a lot of money in today's housing market. Default insurance allows you to enjoy the benefits of homeownership sooner, and insured mortgages are generally approved more quickly.

Default insurance is available from organizations like Canada Mortgage and Housing Corporation (CMHC) and Genworth Financial, who charge a premium based on the percent of your home's value that you borrow. 

Thinking of buying an investment property?

Are you thinking of buying a property to rent out to others? Perhaps even to your own adult children, to help them get a start on life? Before you decide, do your research. There’s a lot more to rental properties than buying a building and hanging out the “Vacancy” sign.

First of all, there's a wide range of choices when you're looking for income properties. For example, you can buy:

Single family homes or multi-family ones
Commercial or industrial buildings that can be rented to business people.

You can spend less than $100,000, or invest millions of dollars. The question is, will it be worth it?

Is a rental property a good investment?

This can vary, depending on a number of factors. For example:

How will you finance your purchase? It may make sense to buy your house with no money down. But taking on a huge amount of debt for the sake of rental income may lead to financial disaster.

How much income can this property generate? What are rents like in the same area? Vacancy rates? Local market conditions determine the rents you are able to charge. Look for a place where the rental income covers the cost of buying the property and paying for it.

How much will it cost to maintain this property? You can buy a building that needs a lot of work, or one that is newly renovated and will need minimal repairs. You can buy a property that you can manage on your own, without extra help. Or, for larger properties, you can hire an onsite superintendent or a property management company.

What are the advantages of a rental property investment?

You can deduct certain expenses from your income reducing the taxes you owe. The list includes:
- Mortgage interest
- Property taxes
- Insurance
- Maintenance/upgrades
- Property management
- Utility bills (if you include them in the rent)

Losses from your rental property can turn into tax relief. If your expenses exceed your rental income, you can subtract that loss from any other sources of income you have. This could reduce your total tax bill.

You will get regular monthly income. Most other investments that offer interest or dividends pay out only once or twice a year. As long as your tenants pay on time, you know exactly what income you will have and when you will receive it.

Property values will likely be more stable than the stock market. With stocks, you can buy and sell shares very easily and quickly. So, share prices can fluctuate very wildly. It is not unusual for the share price of a company to change as much as 5 per cent in just one day.

Property owners, on the other hand, tend to view real estate as a longer term investment. It takes longer to buy and sell. Even when market conditions change, you don’t see the overnight market crashes and massive sell outs that you sometimes see in the stock market.

What are the drawbacks of a rental property investment?

You may have to deal with problem tenants. Working with non-paying tenants can be challenging and stressful if cash flow is tight. Of course, you can try to screen your tenants. But it’s not always easy to tell who may one day fall behind on paying rent, damage property or cause other problems.

It may be hard to sell your property later. Real estate is not a liquid investment. That means it can take time to sell, depending on market conditions. It can also be costly to sell due to real estate and legal fees.
It can be hard to finance your purchase. Under Canada’s new mortgage rules, your down payment must equal at least 20 per cent when you buy a second property. You may also need a mortgage. And, you will have high monthly expenses to cover when you own a building. Of course, you hope the income you receive from your tenants will cover this.

To get approved for a mortgage, your “total debt ratio” must fall within lender limits. At the risk of oversimplifying, your “total debt ratio” is generally your total monthly expenses divided by total monthly income from all sources, including rentals.

That sounds simple, but you need the right advice. A borrower’s ability to qualify often depends on how much of the rental income the lender recognizes.

You’d think that if a tenant pays you $1,000 a month, you could add that $1,000 to your income when qualifying for a mortgage. But in many cases, lenders will credit you with only 50 per cent of the rental income you receive, making it harder for you to qualify.

One last thing to keep in mind about debt ratios. Different lenders have different limits. Some lenders let you have a 42 per cent total debt ratio. Most others permit just 40 per cent. That extra 2 per cent can make a big difference , especially for folks with mortgages on multiple properties.

Being a landlord is not for everyone. Rental units need repair – sometimes on an emergency basis. You might find it difficult to keep up. Or, you simply would not want the hassle of dealing with tenants. ou could hire a property manager. But this will reduce your income from the property.

Remember: Buying a rental property is an investment. It’s vital to do your research before you commit your dollars.

Here are a few things to consider before purchasing a rental property.

1. Do you have enough saved for the down payment?

Under Canada's new mortgage rules, you must come up with a down payment of at least 20 per cent for a small rental property holding from one to four units. This rule does not apply to borrowers whose principal residence also includes rental units. You can purchase a secondary home if it is owner or family occupied with only 5% down. Ask your mortgage professional for details.

2. How much income will the property generate?

You will need to do some research into the neighbourhood. What does rent typically cost, and what is the vacancy rate in that area? Don't assume that you will always have a tenant -- according to the Canada Mortgage and Housing Corporation (CMHC), the average vacancy rate in Canada's 35 major centres is 2.5 per cent. To be safe, assume a four or five per cent vacancy rate into your financial projections, and don't forget to calculate potential costs, such as repairs and maintenance.

3. Can you be a successful landlord?

Being a landlord is a second job. It's not just about finding a tenant and letting the money come in every month. Not only do you have to be available to field emergency calls and keep up with maintenance such as routine fixes, yard work and even shovelling snow, but if you rent to the wrong tenant, you might have even bigger problems to deal with, such as non-payment of rent. Hiring a property manager can help, but that will greatly reduce your monthly profit from the property -- and you never want to be in a negative cash-flow situation.

4. How will deductions affect your profits?

By deducting certain expenses from your income, you can reduce the taxes that you owe. Applicable expenses include mortgage interest, property tax, insurance, property management, maintenance and utility bills. You can also deduct any losses from your rental property. If your expenses exceed your rental income, you can subtract your losses from any other source of income you have coming in.

Purchasing a rental property can be a great way to diversify your investment portfolio, but it is a big commitment. Being a landlord is time-consuming, and not for people who are interested in an easy, passive income stream.

Want to learn more? Check out the Canada Revenue Agency's Rental Income Guide, where you can get more information on deductible expenses, and most other issues regarding rental property.

Sources: Globe and Mail

Updated New Mortgage Lending Rules for 2014

Most recent update to the new lending rules for high ratio mortgages. Some rules are already in effect, however other rules do not start until 2014 such as the heating cost and secured/unsecured credit calculations. These rules will effect how an applicant qualifies for a mortgage that requires mortgage insurance.

Calculation of Debt Service Ratios: Treatment of Key Inputs

Effective July 2012, the Government of Canada fixed the maximum Gross Debt Service and Total Debt Service ratios for insured mortgage loans. This change reinforced the importance of ensuring that debt service ratios provide the same measure of a borrower’s ability to service the mortgage debt, regardless of the lender submitting the application to CMHC for insurance.

CMHC has collaborated with many mortgage lenders to clarify the treatment of key inputs included in the calculation of debt service ratios and minimum documentation requirements for all CMHC-insured homeowner loans. The clarifications include:

Income

Supporting documentation confirming income, employment status and income sustainability are required for all borrowers. Reasonable inquiries should be made and reasonable steps taken to obtain third party verification of the underlying income for all borrowers. This includes substantiation of employment status and income history.

Variable Income:

The variable income level must have been sustained over at least two years and mortgage professionals are to use an amount not exceeding the average income of the past two years. Examples of variable income include bonuses, tips, seasonal employment, investment income, etc.

Where income is increasing year-over-year for four years or more, income for the most recent year may be used. Where income is declining from one year to the next, due diligence is expected to be applied and account for the downward trend.

Self-employed Income (without traditional documentation to support income verification)

Borrowers who have recently become self-employed or operate a new business may have difficulty providing traditional forms of documentation to support income. Reasonable steps are expected to be taken to obtain standard documentation to support gross annual income. Where traditional income documentation is not available, a reasonable effort must be made to assess the plausibility of the income, including consideration of the nature of the self-employment, reported by the borrower before submitting the application to CMHC. Relying solely on borrower disclosure is not acceptable.

Rental Income

Where gross annual income includes rental income from a property that is: not owner-occupied; and not the subject of the current insurance application, the principal, interest, property taxes and heat (P.I.T.H.) of the rental property expenses must either be:

• deducted from gross rent revenue when establishing net rental income; or
• included in “other debt obligations” when the Total Debt Service (TDS) ratio is being calculated.

Guarantor Income

Guarantors'/covenantors' income must not be used for the purpose of satisfying CMHC's borrower qualification criteria unless the guarantor/covenantor occupies the home and is the spouse or common-law partner of the borrower.

Debt

Unsecured Lines of Credit and Credit Cards

For unsecured lines of credit and credit cards, an amount corresponding to no less than 3% of the outstanding balance is to be factored in. In determining the amount of revolving credit that should be accounted for, reasonable inquiry is expected to be made into the background, credit history and borrowing behaviour of the prospective borrower. 

Secured Lines of Credit

For secured lines of credit, an amount corresponding to at least a monthly payment on the outstanding balance amortized over 25 years using the contract rate or the 5-year Benchmark rate (V121764) published by Bank of Canada (if contract rate is unknown), is to be factored in. Approved lenders may elect to apply internal guidelines where the result is at least equivalent to the above.

Heating Costs

Reasonable effort is expected to be made to obtain actual heating cost records for the subject property. Where there is no history of heating cost available for the subject property, the heat expense used for calculating debt service ratios must be a reasonable estimate taking into consideration factors such as property size, location and/or type of heating system.

As per CMHC’s current expectations with regards to approved lenders’ responsibilities, approved lenders may continue to impose underwriting policies that are more stringent than prescribed by CMHC and, subject to reasonableness and prudency, observe their own conventional lending practices in the absence of CMHC policies on a specific issue.

To allow adequate time for the industry to apply the approach, the clarifications will become effective on December 31, 2013.

Source: CMHC

Purchase Plus Improvement Mortgage

Is the home you are going to purchase need some renovations? A purchase plus improvement mortgage helps home buyers pay for their renovations, with one manageable mortgage, and as little as 5% down!

Purchase Plus Improvements is for consumers looking to purchase a home that has great potential but needs a little TLC. This program allows you to make improvements immediately after taking possession of your new home and have the costs rolled into one easy-to-manage mortgage.

The purchase plus improvements mortgage is a very helpful mortgage program for many. It is specially valuable when you find the perfect neighborhood, location, home structure, and price only to be disappointed when they walk in and find pink shag carpet and 30 year old built in appliances.

Purchase Plus Improvement Defined
When a client is purchasing a home and wants to add cosmetic changes through a renovation process using funds advanced by the lender to complete and pay for the renovations.

The Steps to a successful Purchase Plus Improvements Mortgage:

Once the purchase contract is in place, you need to obtain quote(s) on the work to be completed. The quote(s) should be obtained from a reputable contractor or well known company and should be written professionally on letterhead including labor and material costs in an itemized fashion making review simpler.

Once your mortgage is approved and all conditions are met, the lender will advance the entire mortgage amount to the lawyer and condition for the lawyer to hold back the amount equivalent to the renovation cost.

For example:
You purchases a new home for $300 000 with 5% down payment and adds $15 000 in improvements.  The new purchase effectively becomes $315 000 and a 5% down payment on this amount is now required.  The lawyer will receive funds in the amount of 95% of $315 000 and will pay the seller the $300 000 owing and then proceed to hold back the remainder of the funds until the improvements are complete.  Once the improvements are finished and inspected, the improvement funds are released. It is very important to remember that the improvement funds are not released until 100% of the improvements are complete.

Dispelling the biggest question with purchase plus improvements mortgages
The lender will not pay for your improvements up front, rather you will be reimbursed once they are fully complete to the lender’s satisfaction.

Frequently Asked Questions

Q: What is the maximum amount of improvements you can obtain?

A: The maximum amount of improvements allowed are equal to 10% of the purchase price. For Example, if the purchase price is $300,000, the maximum improvements allowed are equal to $30,000 or 10%. If you require more you will require a construction mortgage.

Q: What are cosmetic renovations?

A: Cosmetic renovations are usually smaller adjustments/renovations to the home’s interior or exterior appearance. Examples would include: New Carpets, New Kitchen Cabinets, New Paint, New bathroom fixtures, etc.

An example of a larger but acceptable improvement would be: The addition of a detached Garage, or full basement development. These items are designed to add value to the home and not to correct deficiencies or structural concerns.

Q: What if you want to do the work yourself?

A: Lenders will only compensate for material costs used to complete the improvements. For Example: A client  is very handy and has a background or trade that would allow them to competently complete a small upgrade or renovation on their own, the lender will not compensate for their labor, rather just the materials.  In this case we would ask for a professionally completed and itemized material quote from a hardware depot/store.

Q: Can you use this program to purchase new appliances?

A: That is a great question, in my opinion it should be yes.  However chattel items such as Fridges, Stoves, Microwaves, Dishwashers, etc. cannot be included in this program. These items can be removed from the home upon sale and we cannot include them to directly impact a property’s value.

Link to CMHC Purchase Plus Improvement Program

Source: Mortgage Showdown

Is Your Mortgage Up For Renewal?

With every mortgage renewal comes the opportunity to reflect and assess your mortgage needs before you decide on a new mortgage product. Whether your term is 6 months or 10 years, your mortgage lender will mail your mortgage renewal agreement 30-60 days prior to maturity. Most mortgage renewal agreements are at posted rates. I recommend that your speak with your mortgage professional prior to signing your mortgage renewal, chances are you will get a better mortgage offer than what is offered on the renewal.

You do not have to renew your mortgage with the same lender. You can choose to move your mortgage to another lender if it offers you terms and conditions that suit your needs better. When you refinance your mortgage with a new mortgage lender, the new lender will process the mortgage application as if you are applying for a new mortgage.

If you decide to switch your mortgage to another lender, make sure you verify the costs of changing lenders, such as legal fees to register the new mortgage, fees to discharge the previous mortgage and other administration fees. You can ask if your new mortgage lender will pay for part or all of these fees.

The great news is that upon your renewal date (maturity) you can switch your mortgage to another lender without paying a penalty. This is a great opportunity to discuss your mortgage strategy with your mortgage professional without incurring a penalty if there is another lender that meets your needs or offers a superior mortgage product.

Follow these simple steps to make sure you secure the mortgage renewal that’s right for you:

1. Start early. Did you know that most mortgages can renew as early as 120 days in advance? This option allows you to lock your mortgage in at current rates and renew early without paying a prepayment charge.
2. Consult your mortgage professional. They’ll make sure you have the latest product and mortgage information to help you make a final decision.
3. Renew at maturity. Many people wait for their mortgage to reach maturity before thinking about their mortgage renewal. If this is the case for you, some banks and lenders will offer you the lowest posted rate within the last 30 days of your mortgage term if you choose a fixed rate mortgage. This way if rates increase you are protected during the mortgage renewal process.
   
   
   
   
   
   
   
   
   
   

Bank Mortgage Advisor's Vs. Mortgage Brokers?

When looking for solid trust worthy mortgage advice who do you turn to? Mortgage brokers or bank mortgage advisor'?

Bank Mortgage Advisor

A mortgage advisor at a bank is very much like a mortgage broker in terms of service, availability, flexibility and knowledge, except they work for their respective bank only.  A mortgage advisor will meet with you and work with you just like a mortgage broker to see what your best mortgage strategy and options will be in terms of getting a mortgage.  They can negotiate with the bank on your behalf to get the best deal on a mortgage.  They get paid by the bank, either through commissions, or salary + commission, or just salary.

Mortgage Broker

A mortgage broker is a professional who is a freelancing agent.  They go between the lenders and the borrowers (you) and are paid a commission from the lenders for securing a good borrower.  They don’t work for any one financial institution.  They work for themselves or a team, and have contacts to lots of lenders.  They seek out clients interested in borrowing for or against a home and connect them with a lender that will work for them.  Some can even go between you and the banks for a mortgage. Many people say their mortgage broker can get a better rate than if they went to the banks themselves.  Some people also say that a mortgage broker helped them get approved even though their credit history was poor.

So who to choose? Let’s look at the pros and cons of each.

Bank Mortgage Advisor Pros

• Flexibility: You can see them on your time when and where you want.
• They can offer bank perks such as: discount banking fees, lower interest lending products etc.
• They often pay the appraisal fee.
• Face to face personal meetings.
• Security: Banks likely will not close down.
• Service:  Larger network of support services, there is always someone to talk to at your local bank if you have any questions or concern.

Bank Mortgage Advisor Cons

• You have to do the shopping of different lenders.
• Posted rates are often not as low as mortgage broker posted rates.
• If your credit history is poor, banks may not approve you.

Mortgage Broker Pros:

• Flexibility: You can see them on your time when and where you want.
• You often get a very competitive rate.
• They may be able to get you approved with more than one lender.
• If your credit score is poor or bruised, they may find a lender who will work with you.
• You don’t have to negotiate, they will do the negotiating for you.

Mortgage Broker Cons

• The lenders that offer the lowest rates are often located in different provinces with no local branch service.
• The lenders that offer lower rates are often smaller, unknown companies.
• Some lenders pay higher commissions to brokers than other lenders, a broker may place your mortgage with a higher risk lender because of a higher paid commission.
• Additional mortgage broker fees depending on the type of mortgage needed.
• If you have an issue with your broker you have to deal with the broker, there is typically no "higher authority" to make a complaint to.

After reviewing the pros and cons of each it's ultimately your decision and comfort level on who you would like to work with. If you have a good credit history, then shop around at the banks to see what is offered to you. Each bank mortgage advisor is different but most will provide the best rates and solution for you the first time. If your credit history isn’t the best, then going through a mortgage broker might be the best option for you as you have a greater chance of finding a lender.

Take the time to do your research in finding the right advice because it is the biggest financial decision you will make in your life!

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