Getting a Mortgage for Self-employed Canadians

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After enduring decades of mortgage hassles, self-employed Canadians now enjoy mortgage products designed specifically for them.

It was, after all, only a matter of time before lenders recognized that self-employed Canadians were a powerful – and attractive – group of customers. And their numbers are growing. More than 19% of all Canadian workers are self-employed, according to the latest data from Statistics Canada.

It was the non-traditional lenders who first recognized that the financing needs and qualifying criteria of this group of borrowers was very different than Canadians who receive pay stubs and T4s. But almost every lender – including the banks that turned these people away only a decade ago – now offers at least one option for self-employed homebuyers.

But if you’re self-employed or earn a commission-based salary, then you owe it to yourself to find a top-notch mortgage planner. Why? Because with all the mortgage and loan options now available, it’s a great idea to shop around. It’s a buyers’ market out there; get some guidance on how to build a plan around one of your most reliable and attractive assets: your home.

Consider some of the choices you now have in obtaining a mortgage:

•            You can qualify based on the income that you say you earn. This kind of mortgage is known as “stated income” because the lender takes into account the income you state, and not the income you can prove. After all, good tax planning aims to keep that income low. The income should be reasonable, of course, and the lender may want proof of your self-employment, and a copy of your Notice of Assessment. You will require a 10 per cent downpayment for a purchase and 15 per cent for a refinance on a high-ratio mortgage. For a conventional mortgage, you’ll need 65 to 80 per cent LTV;

•            You can qualify for a mortgage on the strength of a strong credit history, rather than on your income. You’ll need a good credit score and proof that you’ve been self-employed for at least two years;

•            Even with some spotty credit and no proof of income, you may qualify for a mortgage if you have some equity in your home (at least 25%). For these mortgages, qualification is based on your accumulated equity and the value of your home;

•            Re-advanceable mortgages are a great way to take advan­tage of increasing equity. As you create equity through mortgage paydown, the line of credit portion of the mortgage is automatically increased by the same amount. This way you can access your equity when needed without having to apply, offering you more convenience and flexibility than a traditional
line of credit.

It’s the job of lenders, of course, to carefully manage risk. While there is now broad recognition that self-employed Canadians are an excellent and reliable customer group, the rates and options are always best when risk is lowest. Be sure to talk to your mortgage planner about what you can provide: any documentation to prove income and/or employment, a great credit history, a significant down-payment, for example. Any of these will improve your mortgage options and help you get the best rates when shopping for a house or condo.

Forty per cent of all new mortgages in Canada are now arranged through mortgage brokers. If you have your own business, you probably already know it makes sense to go to a specialist to get the job done. The more complex your mortgage situation, the more sense it makes to find an experienced mortgage planner who can customize a mortgage plan to meet your short-term needs and your long-term financial plan. Your home is a very important asset; make the most of it!

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Pre-Approval Before House Shopping: a few tips!

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Credit to dolphinsdock photostream on flick.com

Talk about high-stress shopping. Searching for the perfect home – the place where many of the biggest dreams of your life will unfold – is not exactly like browsing for a new pair of shoes. It’s a much bigger purchase, for starters, and you’ll certainly enjoy it for longer. And of course a good part of your personal and financial life will be riding on the choice you make.

Given all that, it’s surprising that some people who go house-shopping have no clear idea of what they can afford. It’s often a recipe for heartbreak – when the house they’ve fallen in love with is NOT a house they can afford. There’s nothing more disheartening than seeing a client’s dream dissolve when he or she is turned down for a mortgage loan. On the other hand, many homebuyers set their sights too low, too, making a conservative guess on what they can afford, then spending time and thousands of dollars on “moving up” purchases that they might have skipped.

What you want to do is to go house-shopping with a full wallet: with an actual pre-approval from a lender. This way, you will know – to the dollar – what you qualify for and exactly how much it will cost you to carry the mortgage. You’ll also have the interest rate held for you for a specified time period, typically 90 to 120 days.

What is a “Pre-Approval”

So, what exactly is involved in the pre-approval process anyway? You should expect to provide your mortgage planner with information on your employment/income, assets and liabilities, and downpayment. The planner will also obtain a report on your credit history. This diligent analysis of your information is exactly what underpins the strength of a mortgage pre-approval. Your information will then be submitted to the best lender or lenders that can meet your needs.

Most lenders will quickly prepare your pre-approval, which essentially is a conditional mortgage approval that states the mortgage amount, term, interest rate, expiration date, required documents. Of course, it’s important to be aware that you’ll eventually need to substantiate the information you provided for the pre-approval when you go back to the lender for the actual mortgage. That’s why it’s important to provide accurate information.

Even if you have a pre-approval, it’s still recommended that you include in your offer a “subject to financing” clause. A pre-approval qualifies you – the borrower – and not the property. As a result, the final mortgage approval also depends on the house you decide to buy, so it will have to meet with the lending institution’s approval guidelines too. You’ll need to provide the necessary information such as the offer to purchase, MLS listing, and any other documents required by the lender so they can assess the property. Once all of the lender’s requirements have been met, the lender will submit the documents to your solicitor, who will set up an appointment with you prior to closing so you can sign all of the documents and review your closing costs. Then you’re done; you’ve gone from pre-approval to getting ready to move.

Pre-Approval vs. Pre-Qualification

Don’t get a pre-approval confused with a pre-qualification. A mortgage pre-qualification is a much more informal procedure and more of a ballpark figure only, not a firm number of exactly how many dollars will be lent. A preapproval lets you know precisely how much money the lender is willing to let you access, and you’ll receive proof of this offer in writing.

Before you go browsing for a home then, schedule a visit with us to secure your pre-approval. Sellers will know that you are serious, agents will go that extra mile for you, and you’ll know that your new home is within your budget.

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New Mortgage Rules: How will they effect me?

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On January 17th, 2011, the Canadian Finance Minister announced New Mortgage Rules. First and foremost, these new mortgage rules effect only ‘High-Ratio” Mortgages….in other words, home purchases with less than 20% down payment.  In a nutshell, the new rules are:

1)  The maximum mortgage amortization period has been decreased to 30 years (down from 35 years).

2)  When refinancing your home, the maximum amount  you can borrow has been reduced from 90% to 85% of the home’s value

3)  CMHC will no longer insure home equity lines of credit (HELOCs)

It should be noted that these new rules are NOT retroactive.  In other words, if you have a 35-year mortgage, you will NOT be required to switch to a short amortization period.  Even when you renew your mortgage, provided that you remain with the same lender, you can continue with the 35-year term.

What will be the long term effect of these new mortgage rules?

In the long term, a shorter period will mean that home owners will pay less interest on their homes….a key reason why these new mortgage rules were put into effect in the first place.  Also, by only allowing refinancing of 85% of the home’s value, the government is trying to prevent home-owners from over-extending themselves, a little ‘big-brotherish’, but after the global financial melt down, most people would say this is a prudent step.

Short term effects?

If you’re thinking of purchasing a house or condo, please call me anytime to discuss these new mortgage rules and any other home-buying issues.  Bo Kauffmann 333-2202

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Collateral Charge Mortgages or Standard Charge Mortgages?

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Credit to dolphinsdock photostream on flick.com

The mortgage world could be confusing – fixed vs. variable, term, amortization, pre payment and other privileges, restrictions, fees for breaking your mortgage early, porting, along with other fine details. And now homebuyers and owners need to consider between”collateral charge mortgages versus “standard charge” mortgages!
TD Bank announced that effective October 18, 2010 all new mortgages will be collateral charge mortgages. TD Bank joins the many credit unions that also offer only these types of mortgages. If you are considering a collateral charge mortgage it’s worth some investigation before you sign because while there are advantages, there are also some negatives to think about.

What are Collateral charge mortgages?

Collateral charge mortgages can make it easier for homeowners to tap into their equity if their properties increase in value, although making it harder for them to switch to another lender when their mortgages show up for renewal.
For TD Bank customers, they’ll now be able to register their mortgage for approximately 125% of the value at closing, that allows them to take equity out free of charge should their homes rise in value. The downside comes at renewal. For consumers who want to keep their options open at maturity, this isn’t the best product feature because collateral charge mortgages are hard to transfer to another lender. Which means if someone wants to change lenders for a better rate or product feature, they have to start from the beginning and pay new hips. Technically they can be assigned but lenders don’t accept the transfer. With regular standard charge mortgages, you can switch for free, although certain minor charges may apply.
The ability to take out equity is one of the primary options that come with Home Equity Lines of Credit, that are collateral charges for this reason. In these cases, clients want the ability to extract equity once they need it or as it becomes available. If you feel that there is a very good chance you’ll refinance to consolidate debt in order to extract equity for a renovation in order to invest, then a collateral charge mortgage can be a wise decision.

Standard Charge Mortgages

If you don’t believe that you’ll need to refinance or extract equity, then a regular standard charge mortgage will fit you fine, and it will give you the capability to move to another lender at renewal if you want to without incurring hips. In other words, it’s easier for you to maintain your options open.
Whenever the situation looks confusing and complicated, go to a mortgage professional, whose only focus is on mortgages and what each of their over 50 lender partners have to offer. They will analyze your situation and assist you to determine what’s right for you – collateral charge or standard charge mortgages, among the many other mortgage options and privileges that you need to consider.

For information on standard charge versus collateral charge mortgages, talk to an experienced Mortgage Professional.

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Technorati Tags: buying a house, first time buyer, Home equity line of credit, Mortgage broker, mortgage lender, Mortgage loan

Investment Advice: Pay down the Mortgage or invest in RRSP?

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Credit to Feathered Tar photostream on flickr

The often asked Investment advice – Should I pay down my mortgage or invest in an RRSP?
Perhaps you have received a large bonus, won a lottery or your savings efforts have paid off. Whatever the case may be, you suddenly end up with some extra money. What is the best investment advice? Is it smarter to pay down your mortgage or supplement your RRSP? There is no standard answer, since each option has its advantages.

Pros: pay down the mortgage

• – Interest costs within the term of your mortgage become lower
  - Your mortgage is paid off faster
  - The overall cost of your mortgage is reduced

Pros: purchase RRSPs

• – Contributions are tax deductible, which saves serious cash
  - Money grows tax free in your RRSP
  - Your retirement savings will grow more quickly.

One important thing to keep in mind is the fact that an RRSP directly reduces the quantity of taxes you pay in the year you make a contribution. As a result, running out of energy expect to receive a tax refund. While it’s tempting to invest this money, here is some investment advice you can use to get an even bigger benefit from your refund cheque:

• – Contribute to an RRSP and use the tax refund to pay down your mortgage. Get the best of both worlds! This strategy will give you all the advantages associated with paying down your mortgage and investing in an RRSP
• – Contribute to an RRSP and use the tax refund to contribute more for your RRSP. This strategy maximizes the long-term compounding of RRSP assets and helps build a solid capital base to finance your retirement

In seeking investment advice and evaluating which option makes better financial sense for you, you also need to consider a quantity of additional factors such as: your age, your income, expected returns on your RRSP investments, your investment time horizon, your mortgage interest rate including the remaining amortization period and any prepayment privileges. In the end, the best investment advice depends on your particular financesquestion is different for everyone and depends on the math.

For investment advice, talk to your professional financial advisor, as each situation is unique.

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Mortgage Insurance: What are your options?

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Credit to Feathered Tar photostream on flickr

Buying a new home is an exciting experience because it represents your hopes and plans for the future.  For most Canadians, it also means having a mortgage and making regular mortgage payments.  Often the financial institution you have your mortgage with will offer you mortgage insurance.  Is it the right thing to do?  Does it offer the protection you need?

What is mortgage insurance?

Mortgage insurance pays off the amount left owing on your mortgage if you pass away.  Here are some facts you should know before deciding on how best to ensure that your mortgage is paid off in the event of your death:

-        The amount covered by mortgage insurance decreases as the amount owing on your mortgage decreases.  However, premiums DO NOT decrease, they remain the same.

-        The insurance proceeds are paid directly to the financial institution.

-        You may not be able to take your insurance with you if you move your mortgage to a new mortgage company.  This means having to provide current medical and health evidence to become insured.

-        You may not be able to insure both you and your spouse if the mortgage is registered in only one person’s name.

What is the alternative?

Having your own individual life insurance policy offers you the protection of covering your family’s financial needs including your mortgage in the event of your death.  You also have the flexibility of naming a beneficiary of your choice.  Your family may decide to use the benefit to pay down a low interest mortgage and invest the rest.  Or they may need the finds to cover other expenses.  The choice is theirs.

Also, it’s important to remember that since you have an independent life insurance policy from your mortgage, you can transfer your mortgage from one lender to another without affecting your coverage.  You can also choose between temporary insurance and permanent insurance which can be a part of your long term financial plan.  You are able to insure both spouse for whatever amount you’d like so that you can cover other debt or financial needs as well.

The choice is yours but having a discussion with someone that is well versed in both options is important.

To discuss your best options for Mortgage Insurance, please call me anytime.

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Mortgage Broker: Now the primary source for new mortgages!

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Photo by Feathered Tar on Flickr Photostream

A Fall 2010 study commissioned by the Canadian Association of Accredited Mortgage Professionals (CAAMP), in collaboration with Maritz, reveals that Canadian mortgage debt has exceeded one trillion dollars, an increase of 7.6 per cent over the same period last year. CAAMP expects this debt load to continue increasing, but at a slower pace.

The study highlights the excellent value provided by a mortgage broker (options from a wide range of lenders, expertise), with 40 per cent turning to a mortgage broker as the professional of choice for their new mortgages. Clearly, today’s generation of home-buyers are very savvy about seeking out options. They don’t feel like they’re tied to a particular bank. No one “owns” them, in their view.And when it comes to all homeowners with a mortgage, 40 per cent consulted a mortgage broker when shopping for their financing, up five per cent from last year.

Overall the report points to a healthy mortgage and real estate market in Canada. Some of the highlights include:

• The vast majority (84 per cent) are able to afford increases of $300 or more in their monthly mortgage payments.
• Overall home equity is at 72 per cent, and for homeowners who have mortgages, home equity levels average 50 per cent.
• Over one third of mortgage holders are making voluntary additional payments: 16 per cent have increased monthly payments during the past year, 12 per cent have made lump sum payments, and 7 per cent did both.
• The majority (66 per cent) continue to choose fixed-rate mortgages, highlighting the general conservatism of Canadian homeowners.

A Mortgage Broker can help

According to the study, 18 per cent of mortgage borrowers took advantage of their property’s value to take equity out of their homes .The most common purpose for equity take-out is debt consolidation (45 per cent), home renovations (43 per cent), purchases or education (19 per cent) and then investments (16 per cent). Several respondents used their equity for a combination of these purposes.

This increase in mortgage debt is not necessarily negative. It makes sense for many homeowners to refinance their high interest debt at today’s low mortgage rates, which allows them to save considerably on interest costs and boost their cash flow if needed.  Home renovations not only improve the quality of life for homeowners, they very often increase the value of the home (see http://www.aicanada.ca for tips on which renovations have the greatest payback). And of course, when borrowing to invest, the interest on the amount borrowed may be tax deductible (a tax and investment professional must be consulted when borrowing to invest).

Overall, the Canadian housing and mortgage market is sound, and Canadians continue to appreciate that real estate is an excellent long-term investment.

For your mortgaging or re-financing needs, consider using a Mortgage Broker.

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Technorati Tags: buying a house, first time buyer, mortgage, Mortgage broker, Mortgage loan, real estate

Mortgage Rates: Variable is a good option!

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Photo by Christopher Chan on Flickr

It’s been a great ride! Canadian homeowners have been benefiting from ultra-low mortgage rates over the last two years. Unfortunately the time has come: the rate climate is starting to heat up. As the Prime lending rate starts to gradually increase toward more normal lending rates of 5% to 6%, do variable mortgage rates still make sense? Of course the answer depends on your own personal situation, but there are definite compelling reasons to choose variable mortgage rates.

Fixed-rate mortgages play a significant role with many Canadian homeowners, particularly those who may lose sleep wondering what will happen next with rates. Fixed mortgage rates are also ideal for those on a very tight budget; a fixed rate gives you the security of knowing exactly how much your mortgage will be so you can plan accordingly. Many first-time homebuyers are choosing fixed mortgage rates for this reason.

For those who are not on a tight budget,  variable mortgage rates can be a wise financial move, even in a rising rate environment. Lenders offer variable-rate mortgages at the Prime lending rate minus a certain percentage, which varies by lender. So as the Prime rate increases, so will your mortgage payments. How fast Prime will increase will be determined by inflation and other key economic factors. Studies have shown that most Canadians hold their mortgage for 15 years or longer, and that over the long term, less overall interest is paid with a variable-rate mortgage. If you believe that minimizing the total amount of interest you pay over the life of your mortgage is an important goal, then the case for variable-rate mortgages is very strong.

The question to ask is: what do you want to pay right now – a lower variable rate, or a higher fixed rate? Prime rate increases tend to be gradual so it can take several Prime increases to reach current fixed rates. In the meantime, you can keep your savings for lifestyle, investments or to pay down your mortgage! Let’s compare using today’s rates for a $250,000 mortgage, assuming Prime increases 0.50% per year:

5-year Fixed Mortgage Rates (3.69%)

Monthly                         Interest
Year            Payment            Balance            Paid

1                   $1,273            $243,770            $9,051

2                   $1,273            $237,309            $8,819

3                   $1,273            $230,607            $8,578

4                   $1,273            $223,655            $8,329

5                   $1,273            $216,444            $8,070

Total Paid:  $76,380            Total Interest: $42,847

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5-year Variable Mortgage Rates (Prime -0.7%)

Monthly                         Interest
Year                      Payment            Balance            Paid

1 (2.30%)            $1,095             $242,502            $5,644

2 (2.80%)           $1,155             $235,298            $6,659

3 (3.30%)            $1,215            $228,326            $7,608

4 (3.80%)            $1,274            $221,531            $8,482

5 (4.30%)            $1,332            $214,861            $9,312

Total Paid:  $72,852        Total Interest: $37,705

Difference in total payments                        $3,528

Difference in interest paid                            $5,142

Difference in total balance                            $1,583

Total Savings                                                $10,253

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In this case, choosing variable mortgage rates allows you to keep $10,253 over those five years, even though the Prime rate was rising. Of course, the Prime rate could increase faster than what has been used in this example. Since no one can accurately predict interest rate movements, your best bet is to have a good conversation with an experienced mortgage planner who can help you assess your own situation, and determine if a variable-rate mortgage is right for you.

If you would like to discuss your options when it comes to Mortgage Rates, be sure to consult a professional who has your best interest at heart.

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Mortgage Rates, Housing and Economic Outlook

Hi everyone:

credit to Kevinpoh on Flickr

I had the pleasure and good fortune to listen to a presentation by Mr. Benjamin Tal, the Deputy Chief Economist with CIBC World Markets Inc.  The one-hour presentation touched on many topics, including economic outlook for the United States, Canada and China, the future of mortgage rates and housing markets, and a number of other topics. For a local perspective, read my market outlook for Winnipeg.

Here are several highlights which I found interesting:

15 million U.S. homeowners owe more on their homes than the homes are actually worth! Whats worse, 10 million of those are over-mortgaged by 20% or more.  So for example, they might owe $300,000 on a home which is now worth only $250,000.

The US Government (The FED) is continuing to print more money, and infuse it into the economy, in hopes of stimulating the economy.  Unfortunately, consumers are skidding and are actually SAVING money at a rate which is higher than the norm.  The end result is that while more money is being introduced, it is not changing hands, which buts a break on economic recovery.  While the good news is that this will protect consumers in case of another recession, it is also not helping us break out of the CURRENT recession.  In Canada, by contrast, people are at an all-time high debt-to-income ratio, meaning that Canadians have been only too happy to spend money.  Part of the evidence is that only 20% of Canadians feel negatively towards the economy, whereas 60% of our American cousins do so.

Because of this lack of spending among American consumers, Mr. Tal believes that interest rates will remain stable over the next 12 months, and if any rise follows, it will be a very small one.  Since the Canadian interest and mortgage rates are linked to the U.S. rates, this should bode well for Canadians as well.

Another interesting revelation was that Canadian homes, on average across the country, were priced at approx. 11% above “Fair Value”, with the definition of ‘fair value’ being determined by several factors such as income and cost-of-living.  Which often raises the question:  Are we experiencing a housing ‘bubble’? Mr. Tal was quite emphatic when he rejected this possibility.  He explained that in order for a housing ‘bubble’ to burst, we require two things to happen:  1) a dramatic rise in interest and mortgage rates and 2) a sub-prime type of situation, similar to what had occurred in the US.

As he had explained this reasons for the mortgage rates to remain stable, item #1 is not likely to occur.  And since Canadian Banks operate a a significantly higher standard that their US counterparts, item #2 is unlikely as well.

Fixed or Variable Mortgage Rates?

As a final point, Mr. Tal addressed the age-old question of  “What’s better,….fixed mortgage rates or variable?” He felt that over the next 5 years, it would be (slightly) beneficial to keep your mortgage at a variable rate.  He added that this will be especially true over the next 3 yrs, and a little less so over the following 2 years beyond that.

If you would like to discuss your house or condo buying options, please call me anytime.

Bo Kauffmann  333-2202

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Winnipeg Mortgage Broker:  Top questions a home buyer should ask

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So you’re thinking of checking out  a Mortgage Broker in Winnipeg?

Good for you. Actually, there are at least 10 reasons to use a Winnipeg Mortgage Broker.  You’re about to make what is likely the most significant purchase of your life; it’s good to get some financial advice. Stop thinking of a mortgage as a big fat loan – and start thinking of it as a tremendous financial tool. Properly structured, the right mortgage can build your wealth, protect you from a  financial downturn, and save you thousands of dollars. A  experienced, skilled mortgage broker in Winnipeg is going to give you the best overall view of what’s out there for you in the marketplace – and can tailor a mortgage that suits you perfectly.

Firstly, understand that your bank – great as they are at your day-to-day banking – may not always be the right choice for your mortgage. That’s because there are many options for getting a mortgage in Canada – including about 50 major lenders. Your bank represents one available lender – and  it doesn’t always make sense to restrict yourself to a single lender. That’s where a mortgage broker come in.  Home-buyers are increasingly savvy, demanding more information, more choice, and better value with their mortgages. And that’s why they’ve been increasingly turning to a professional mortgage broker, who can offer almost instant access to rates and features from a huge range of lenders.

How do you pick a good Winnipeg mortgage broker? Here are a few questions to ask:

1. How long have you been a Winnipeg mortgage broker? Experience is critical, as it is in every industry. But sometimes a fresh young broker is working with the support of an experienced broker – so ask about that person too. Your young broker may be dynamite – and can lean on a more experienced planner if needed. It’s actually a good sign to see this kind of mentoring in the workplace; it shows they’re in it for the future. Don’t be afraid to ask what the broker’s annual volume is. A broker doing over $10 million annually is not that “young’ in terms of mortgage transactions experience..

2.  Do you have your AMP designation? The Accredited Mortgage Professional designation means that the mortgage broker has professional training, and meets certain ongoing education and professional requirements.

3. How many lenders do you work with? While there are over 50 lenders in the marketplace, most brokers work with a shorter list, where they are able to get to firmly know the company and their guidelines. You want to be sure that your Winnipeg mortgage broker has a solid stable of lenders, but you don’t want all of their business going primarily to just one, otherwise they likely aren’t being as objective as they should be, unless they specialize in a specific product that is only available through that lender.

4.  How much of your business is referral business? Where the business comes from says a lot about the mortgage broker’s service. The best brokers receive a very high majority of their business from referrals from satisfied customers.

5.  Do you charge fees? For most standard “conventional” deals, a mortgage broker does not charge fees.  They may charge a fee if the lender isn’t paying a commission or where the deal is complex and takes considerable time to package and close.  Charging fees isn’t necessarily a negative, you just have to understand the situations where they are charged.

Trust your instincts. A good mortgage broker will look professional, will have a high-quality website or other materials, and will make you feel comfortable asking questions. After they’ve told you what they’ll do for you, ask them what happens if your mortgage isn’t approved. A good broker will work with you – to help you improve your credit, for example. If the broker is just interested in the deal on the table, move on.

The right Winnipeg mortgage broker will make a significant difference in your financial life. When you’ve got a partner to help you achieve your financial and home ownership goals, you’re on your way!

If you’re interested in speaking with a Winnipeg mortgage broker, call or send an email and we’ll set something up.

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