Fixed or Variable? Why not both!

Here’s the situation: you’re in the market for a mortgage. Your timing is perfect because rates have never been so low.  Your colleagues at work took a variable and can’t believe the unbelievably low effective rate they are paying. Your parents are conservative old school and think it would be foolish to pass up on locking in a fixed 5 year for less than 3.50%. What are you to do?

Take the best of both worlds!

At the time of writing the effective rate for a 5 year variable rate mortgage is 2.55%* with very little probability that the Bank of Canada prime rate will change in the near to mid-term. A fixed 5 year is at 3.49%*.  The spread between the two options is only 0.94%.  If you are a consumer trying to decide fixed vs variable, it would be difficult to determine which option will out perform the other. We are really in uncharted territory… both have pros and inherent drawbacks.

Here’s how you can protect yourself: take a 50/50 mortgage. The 50/50 mortgage allows you to lock half of your balance as a fixed rate and the remaining half as a variable rate mortgage.  In doing so you are benefiting from the positives of each and spreading the risk over your entire mortgage.

Most people would agree that investment diversification is the key to a solid investment portfolio. The same holds true for your mortgage: Rate diversification.

There are only a handful of lenders who offer these great 50/50 mortgage products. One of my favorites is CIBC who are currently offering their Home Power Plan.

 

Ontario Land Transfer Tax Refunds For First-Time Home Buyers

Are you a first-time home buyer? Do you know you can save up to $2,000 on land transfer tax in Ontario. It occurred to me that not every first-time homebuyer considers land transfer tax when they are budgeting for their purchase or applying for their mortgage and as far as closing costs go, this is a big one to overlook, particularly if the purchaser does not qualify for any rebates.  The purpose of this article is to shed some light on how land transfer tax is calculated and the criteria for rebates that are currently available for first-time homebuyers.

How to Calculate Land Transfer Tax

In Ontario, the provincial government collects land transfer tax on the disposition of land or a beneficial interest in land pursuant to the Land Transfer Tax Act (Ontario).  On February 1, 2008, the City of Toronto instituted its own land transfer tax which mirrors, and is paid in addition to, the Ontario land transfer tax. There are various transfers that are exempt from both taxes, such as a transfer between spouses pursuant to a written separation agreement or a transfer between a trustee and beneficial owner of land.  For the purposes of this article, I will focus on land transfer tax that is payable upon the sale of residential real estate in the City of Toronto, assuming that no exemptions apply.

Ontario and Toronto land transfer taxes are payable on the consideration that passes from the transferee to the transferor of property and the amount, if any, of a mortgage or debt being assumed by the transferee as part of the transfer.  The current formulas for determining land transfer taxes are as follows:

Ontario land transfer tax:

• 0.5% – on the first $55,000
• 1.0% – on portion between $55,000 – $250,0001.
• 5% – on balance over $250,000
• 2.0% – on anything over $400,000

Toronto land transfer tax:

• 0.5% – on the first $55,000
• 1.0% – on portion between $55,000 – $400,000
• 2.0% – on anything over $400,000

Land Transfer Tax Rebates for First-Time Homebuyers

For first-time homebuyers, the Ontario government offers a land transfer tax rebate of up to $2,000.00 and the City of Toronto offers a land transfer tax rebate of up to $3,725.00.  To qualify for these rebates, the homebuyer must meet the following criteria:

1. they must be at least 18 years of age;
2. they must occupy the home as their principal residence within 9 months of the date of transfer;
3. they cannot have owned a home, or an interest in a home, anywhere in the world at any time;
4. if they have a spouse, their spouse cannot have owned a home, or an interest in a home, anywhere in the world while being their spouse;
5. in the case of a newly constructed home, they must be entitled to a Tarion New Home Warranty; and
6. they cannot have previously received an Ontario Home Ownership Savings Plan-based refund of land transfer tax.

If there is more than one homebuyer and only one of them is a first-time homebuyer, that first-time homebuyer will only be able to claim a fraction of the rebates equal to their interest in the property (so if they only acquire a 50% interest in the property, they will only be able to claim 50% of the rebates).  As well, if a first-time homebuyer has a spouse who owned a home or an interest in a home anywhere in the world while being their spouse, neither one of them will qualify for the rebates; if, however, the first-time homebuyer’s spouse sold his or her home or interest in a home prior to becoming their spouse, then the first-time homebuyer can claim their 50% share of the rebates and their spouse’s 50% share of the rebates (for a total of 100% of the rebates) even though the spouse is not, by definition, a first-time homebuyer.

Confused yet?  Here’s an example to help clarify how the rebates work:
Consider a couple, Jack and Jill, who are not spouses but are purchasing a home together for $400,000.  Jill is a first-time homebuyer and Jack is not.  The land transfer tax that would be payable by Jack and Jill is as follows:

• Provincial land transfer tax:  $4,475.00
• Municipal land transfer tax:  $3,725.00
• Total land transfer tax:  $8,200.00

Assuming that all of the criteria for the rebates are met and Jack and Jill are each acquiring a 50% interest in the home, Jill can claim up to 50% of the rebates for a total savings of $2,862.50 (50% of $2,000 and 50% of $3,725).   If Jill acquired a 75% interest in the home, she would get a corresponding increase in the amount of rebates she could claim – in that case, Jill could claim up to 75% of the rebates for a total savings of $4,293.73 (75% of $2,000 and 75% of $3725).

If Jack and Jill were spouses of one another, the outcome would depend on whether Jack sold his home before becoming Jill’s spouse.  If Jack did not sell his home before becoming Jill’s spouse, then neither one of them would qualify for the rebates; if, however, Jack sold his home prior to becoming Jill’s spouse, then Jill could claim her 50% share of the rebates and Jack’s 50% of the rebates (for a total of 100% of the rebates).

At the end of the day, it is important to consider land transfer tax and available rebates when budgeting for your first home purchase.

Source: Baker Lawyers,Ontario LTTR

10 Mortgage Mistakes First Time Home Buyers Can Avoid

You’re excited! You’ve decided to dip your toe into the rushing river that is Canadian real estate and buy your first home. But the roaring sound of that river can be overwhelming. Where to start? Your mortgage financing is one of the most critical aspects of your first purchase. And you want to get it right.

With so many choices, brands and products you might prefer to take an ostrich like approach and bury your head in the sand to avoid the racket. While you don’t need to understand all of the finer details of mortgage financing you should be mindful to avoid some common mistakes that I’ve observed over the years. Below are 10 mortgage mistakes to avoid for first time home buyers.

1. Not Checking Your Credit  Your credit score is very revealing and allows the lender to get a clear picture of your credit risk.  The first thing you should do when considering a mortgage before even talking to a mortgage professional or lender is have a look at your credit report. This way you can make sure that you have time to make any necessary improvements before applying to lenders. You can check your score on the Equifax website.

2. Applying for New Credit At The Same Time As Your Mortgage Part of the algorithm that calculates your credit score looks at how recently you’ve requested credit. Seeking credit through a car loan or credit card while you’re applying for a mortgage can negatively effect your score. If possible it is best to avoid applying for credit. By the same token, it is best to avoid large purchases like automobiles because the large monthly payments will effect the total mortgage amount you qualify for.

3. Failing to Look at the Total Housing Payment I often sit down with first time home buyers who think that buying a house costs less than renting because the mortgage payment is less than their rent. What they fail to realize is that there is a lot more to home ownership than mortgage payments. We use the acronym PITH in the mortgage industry to account for all aspects of your monthly payment (Principal + Interest+ Taxes+ Heat). You also need to account for your insurance costs and/or condo fees.

4. Skipping The Pre-Approval Before shopping for a home, make sure you can actually qualify for financing by getting a pre-approval. A pre-approval means that a mortgage lender has had a look at your credit and considered your income to determine how much mortgage you can realistically afford and in turn how much house you can buy. 

5. Failing To Prepare Your Assets Believe it or not one of the most challenging parts of the mortgage approval is showing your liquid assets to the lender for the down payment. Lenders are required by the Anti Money Laundering and Terrorism Act to request a 90 days look back of all your accounts to see the source of your down payment. It is not enough to just show a deposit in your account 7 days before closing. Gifts are allowed under particular circumstances.

6. Job Hopping Lenders are looking for income stability and consistency. If you have been a busy bee jumping from one employer to the other the lender may decide not to approve your mortgage. If you are changing jobs within your industry there is leniency depending on the overall strength of your application but if you are making any major changes it might be best to wait until after your purchase or hold off buying for a few months at least until your probationary period has expired. 

7. Not Shopping Around The mortgage market is dynamic. At any given time different lenders could be offering great interest rate specials or products that suit your needs. Mortgage professionals work directly with the lender, and know the best rates and deals. They are like your personal shoppers. The best part is you don’t pay for their services.

8. Chasing Exotic Mortgage Programs When it comes to mortgage lenders if a deal sounds too good to be true then it probably is. In a market where most borrowers are fixated on rate it is easy for lenders to structure mortgages in such a way that the rate looks good but they eliminate all other privileges or worse can’t be broken without paying all of the interest due over the term of the mortgage.

9. Forgetting to Lock Your Rate You may feel that you don’t need a pre-approval because you have strong credit and plenty of income and down payment. The pre-approval also serves an equally important function other than giving you a figure to work with. The pre-approval works as a ratehold to lock in an interest rate for 120 days. If rates increase while you are searching for a home you have the benefit of a protected rate.

10. Not Reading Your Mortgage Documents When you finally make an offer to purchase a home the lender converts the pre-approval into a commitment letter where they spell out the specifics of the mortgage. This is an important document to review and read as it contains all of the terms and conditions of the mortgage including your obligations, costs and privileges. I always read it together with my clients to translate it into normal English. Make sure you understand it and ask questions.

Source: Son of a broker

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Need a down payment for a mortgage? Get it from the government!

Looking to purchase a home but do not have the the required down payment? Look into the Ontario Affordable Housing Program (AHP) it could be the solution for you.

In 2005, the federal and provincial governments signed a new Canada-Ontario Affordable Housing Program Agreement (AHP). With this commitment, the federal, provincial and municipal governments will have invested at least $734 million through the Canada-Ontario Affordable Housing Program. The AHP comprises four components: Rental and Supportive, Housing Allowance/Rent Supplement,
Northern Housing and Homeownership. Under the Homeownership component of AHP, lower-income renters can apply for interest-free down-payment assistance loans to purchase a home.

What Type of Home Can I Buy?
The home can be new or resale. It may have a selling price at or below the maximum selling price set for your municipality. The home must be modest in size, relative to community standards.
A home in which the applicant – or any member of the applicant’s family – have an ownership interest is not eligible for purchase under the Homeownership component of the AHP.
Some municipalities offer down-payment assistance in partnership with local builders. Check with your municipality for affordable homeownership developments in your area.

The Application
Application forms are available from the housing department of your municipality or through an organization delivering the program in your area. Applicants must submit their application with all necessary documentation (see What You Will Need). In order to participate and be eligible for the program, applicants must be able to secure mortgage financing through a lending institution. If your primary lending institution is requesting mortgage insurance, you may be eligible for additional flexibilities through the Canada
Mortgage and Housing Corporation (CMHC).

Terms of the AHP Loan
The AHP loan is for a period of 20 years. No interest is charged on the loan.
The unit must remain the sole and principal residence of the applicant for the entire 20-year period. It may not be leased to an other party. On the 20th anniversary date of the agreement, the loan is automatically forgiven, provided there has been no default under the terms of the loan. If the home is sold before 20 years or the loan is in default, the amount of the down-payment assistance plus a percentage of the capital gain (appreciation) realized through the sale may be payable to the municipality. In most circumstances, if the house is sold for less than the original purchase price, down-payment assistance would be waived provided the unit is sold at fair market value and the purchase and sale of the unit is an arm’s-length transaction.
The loan may be paid at anytime throughout the 20-year period. The owner would be responsible for repaying the amount of the AHP loan in full, and a percentage of the appreciation of the home based on the current market value of the home at the time of repayment.

WHAT YOU WILL NEED
• Agreement of Purchase and Sale
• Proof of mortgage approval by primary lending institution
• AHP Homeownership component application form
• Photo identification
• Proof of household income

Purchasing a Home
Once the offer on the home is accepted, approved applicants must provide an Agreement of Purchase and Sale for the home and a mortgage agreement from the primary lender.

AHP Loan Agreement
The AHP loan agreement outlines the terms of the down-payment assistance. The amount of the AHP Homeownership loan will be secured on title through an AHP mortgage. No interest is charged on the loan.
On the date of closing, the AHP loan is advanced and put towards the down-payment on the home.

Am I Eligible?
An Interest-Free Loan Under the AHP, every region in Ontario has been allocated a specific amount of funding to assist low to moderate-income rental households to purchase affordable homes through interest free down-payment assistance loans. It will be up to each municipality to determine the value of the loan for each purchaser, in accordance with mandatory program requirements. Applicants must be at least 18 years old and have a combined household income at or below the maximum eligible income limit for their area. Applicants who own or partly own a property do not qualify for down-payment assistance under the Homeownership component of the AHP. 

Contact your Mortgage Professional to learn more.

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