Mortgage Moment: When Life Gives You Lemons…

We all do it. Even I fall guilty to it at times. It’s really a part of Human Nature…and really what fun is life without it?

What exactly are we talking about? Dreaming. We make grand plans and lay them out with the utmost care. We write them out, daydream about them, and (hopefully) we make them come true! There is nothing wrong with doing this…not a single thing! However, as many of you know, rarely do the dreams and plans we lay out stay on course as we would like them to.

This holds true many times for mortgage clients. We find that many times, what they initially come to us with when they are being pre-approved, rarely is the same less than 3 years later (There’s a reason 6 out of 10 Canadians break their 5-year term mortgage early).

Recently, we had just this happen with one of our clients. A young, working professional couple, found themselves in a difficult situation when one of them was injured and went on long-term disability leave.

Their income took a significant drop due to this and their cash flow was of course, negatively impacted. They relied (as many people do) on credit cards and at one point also took out a line of credit. They were able to make minimum payments each month on their loans and debts, but the problem sat with the interest rates. They kept getting higher and the debt they carried wasn’t being reduced.

Basically, life had handed them some lemons.

At this point, they felt they were left with one option: seek private funding. The problem with this was fear of losing their home if they approached their lender. The interest rate quoted by the private lender was less than that on their credit cards, but still higher than what was reasonable. The couple felt that seeking to obtain a second mortgage would be the best-case scenario. However, with a rate of 10% plus a lender fee of up to 6% of the loan amount and a 1 year term with renewal fee of 1% for total amount borrowed, this was not at all ideal!

This is where we stepped in and decided to make some lemonade! Here is how the story played out once they came to see us:

1. We were able to use the income received from disability and refinanced their existing mortgage
2. We consolidated the credit card and line of credit debt at a rate of 2.35% in doing so we reduced their current monthly payments by $1500 with an annual savings of $18,000! Or $90,000 over five years!

Here is a brief number summary to give you the full recap:

Value of the Home: $525,000

Requested Mortgage Amount: $420,000

Loan to Value: 80%

Income Documentation:

1. Letter of employment and pay stub
2. Letter from insurance company detailing disability payments and confirmation of deposit into current bank account.

Credit Score: 746 & 676

Total Debt Service Ratios: 41%

Mortgage Solution: All debts were paid with proceeds from their 5-year variable-rate mortgage with a 30-year amortization. The annual savings was MORE THAN $18,000!

 We helped this couple get back on track and allowed them to keep on dreaming! We understand that life rarely will stay on course and go just as you picture it, but there is often a creative solution that can help you get back on track. If life has handed you a few lemons and you aren’t sure where to start, visit a Dominion Lending Centres Mortgage Broker—they can make some of the best lemonade!

Geoff Lee

Dominion Lending Centres – Accredited Mortgage Professional

It’s not all about the rate: Amortization & Renewals

Have you spoken to a mortgage broker lately? When it’s time to renew your mortgage you have the freedom to do a number of things that are not possible at any other time without a financial penalty. Renewal time is an opportunity.

Have you looked at your mortgage amortization lately? Let’s say that you started your present mortgage 10 years ago and you had a 30-year amortization. You now have 20 years left on your mortgage but your situation has changed. Your children have grown up and one is ready to leave for college and another one will follow in a couple of years. An easy way to help the kids out would be to refinance your home. However, the rules have changed and if the value of your home has not risen a lot and you have not paid down the balance, you may not have the 20+% you need to withdraw the equity.

Another possible solution would be to use the amortization on your mortgage to help you achieve your financial goals.
You can extend the amortization and lower your monthly payments thus freeing up cash flow.

Here’s an example. With a balance of $400,000 on your mortgage:

By adding 5 years to your mortgage you can lower your payments by $320 a month. If that’s not enough and you have more than 20% equity , in other words, your mortgage is less than 80% of the value of the home, you can extend your mortgage to 30 years with most lenders.

This will free up $520 a month. When your children graduate you or your mortgage broker can contact the lender and have your amortization lowered again. Note that changing the amortization can result in costs. Check with your Dominion Lending Centres mortgage broker before you make any changes to your mortgage.

David Cooke

Dominion Lending Centres – Accredited Mortgage Professional

5 ways you can kill your mortgage approval

So, you found your dream home, negotiated a fair price which was accepted. You supplied all the needed documentation to your mortgage broker and you are waiting for the day that you go to the lawyer’s to sign the final paperwork and pick up the keys.

All of a sudden your broker or the lawyer calls to say that there’s a problem. How could this be? Everything has been signed and conditions have been removed. What many home buyers do not realize is that your financing approval is based on the information the lender was provided at the time of the application. If there have been any changes to your financial situation, the lender is within their rights to cancel your mortgage approval. There are 5 things that can make home financing go sideways.

1 Employment – You were working for ABC company as a clerk for 5 years making $50,000 a year and just before home possession you change jobs. The lender will now ask for proof that probation for this new job is waived and new job letters and pay stubs at the very least. If you change industries they will want to see more proof that you are capable of keeping this job.
If your new job involves overtime or bonuses of any kind that vary over time, they will ask for a 2 year average which you will not be able to provide.
Another item that could ruin your chances of getting the mortgage is if you decide to change from an employee to a self-employed contractor just before possession day. Even though you are in the same industry, your employment status has changed . This is a big deal killer.

2. Debt – A week or two before your possession date, the lender will obtain a copy of your credit report and look for any changes to your debt load. Your approval was based on how much you owed on that particular date. Buying a new car or items for the new home need to be postponed until after possession of your new home.
Don’t be fooled by “Do not pay for 12 months” sales campaigns. You now owe this money regardless of when the payments start. Don’t buy a new car and don’t buy furniture for the new home. This will increase your debt ratio and can nullify your financing.

3. Down payment source – And yet again I reiterate that the approval is based on the initial information you have provided. You will be asked at the lawyer’s office to verify the source of the down payment and if it is different than what the lender has approved, then you may be in trouble. For example, you said that you were going to save the funds and then at the last minute Mom and Dad offer you the funds as a gift. There’s no problem accepting the gift if the lender knows about it in advance and has included this in their risk assessment, but it can end a deal.

4. Credit – Don’t forget to make your regular credit card payments. If your credit score falls due to late payments, this can kill your financing. If you have a high ratio mortgage in place which required CMHC insurance, a lower credit score could mean a withdrawal of their insurance once again , killing the deal.

5-Identity Documents – This can be a deal killer at the lawyer’s office. The lawyer is required to verify your identity documents and see that they match the mortgage documents. Many Canadians use their middle names if they have the same name as their parent. Lots of new Canadians adopt a more Canadian sounding name for their day-to-day lives but their passports and other documents show another name.

Be sure to use your legal name when you apply for a mortgage to avoid this catastrophe . Finally, keep in touch with your Dominion Lending Centres mortgage professional right up to possession day. Make this a happy experience rather than a heartbreaking one.

David Cooke

Dominion Lending Centres – Accredited Mortgage Professional

A few reasons why you should consider a Variable Rate Mortgage

Five-year fixed mortgage rates continued their upward march last week as the five-year Government of Canada (GoC) bond yield they are priced on hit its highest level in seven years. Meanwhile, five-year variable-rate discounts deepened, further widening the gap between five-year fixed and variable rates.

When I started working in the mortgage industry in 2005, variable rate mortgages saved you more money than fixed rate mortgages 95 out of the past 100 years. First time home buyers were worried about what their home costs would be and avoided variable rate mortgages (VRM’s) because of the risk of rates going up higher than the fixed rate, but experienced home owners often took a VRM at mortgage renewal time.

However, in the past 5 years, most people have gravitated towards fixed rates because the gap between fixed and variable rates was small enough that the cost of uncertainty outweighed the potential reward for most borrowers.

Once again , the gap is widening. While fixed rate mortgages are going up due to the bond yield, variable rate mortgages have moved in the other direction.  Two years ago a VRM would be offered at Prime rate + .20%,  but later it reverted to Prime – .30% . In recent months, rates have dropped even further with some lenders offering Prime -1.0% !  You now have a choice between a 5-year fixed rate of 3.44-3.59% depending on the lender and a variable rate with a discount that calculates out to 2.45% . With a gap this large, it’s worth considering if you are risk tolerant enough to have a VRM.

Even if you are skittish, you can ask your Dominion Lending Centres mortgage broker to notify you if rates are going up and switch you to a fixed rate if they go above a certain percentage. Will your bank do that for you? I don’t think so. Be sure to have this discussion with your broker when your mortgage comes up for renewal or if you are considering a home purchase.

David Cooke

Dominion Lending Centres – Accredited Mortgage Professional