Collateral Mortgage Charges – The Facts

General Peter Paley 30 Dec

Collateral Mortgage Charges – The Facts

As the financing world changes with tighter policies, new regulations and tougher qualifications, I feel it is very important to revisit some information surrounding Collateral Mortgage Charges.
A collateral mortgage charge according to The Financial Consumer Agency of Canada website is;
Collateral charge

A collateral charge can be used to secure multiple loans with your lender, including a mortgage and a line of credit.

The charge can be registered for an amount that is higher than your actual mortgage loan. This allows you to potentially borrow additional funds on top of your original mortgage loan in the future without having to pay fees to discharge your mortgage and register a new one. You only have to make payments, including interest, on the money you actually borrow.
A new charge will only be required if you want to borrow more than the amount that is registered on the original charge. You’ll still need to apply for additional money and re-qualify.
Changing lenders when you have a collateral charge

A collateral charge may make it more difficult to switch lenders at the end of your term. Some lenders may not accept the transfer of your collateral charge mortgage.
To change lenders you’ll need to discharge your mortgage. You’ll need to repay, or transfer to the new lender, all loans you’ve secured with a collateral charge. This may include car loans or lines of credit. You may also have to pay fees such as legal, administrative, discharge and registration costs. Check with your lender for details and if any discounts are available to you.

https://www.canada.ca/en/financial-consumer-agency/services/mortgages/choose-mortgage.html

This type of registration is becoming more and more popular with The BIG banks and Credit Unions alike. There are a few reasons why financial institutions are switching to this. I’ve made a pro/con list for you to help you decide whether this may or not be good for you.

PROS:

1). Mortgage is registered at a higher amount to allow for future borrowing. This means if you had to remortgage in the future either for a refinance or a Home Equity Line Of Credit that you wouldn’t have to re-register the mortgage and pay legal fees.

CONS:

1). All you debt with your lender can now be attached to your mortgage. A lender will usually use the term ‘all indebtedness’. This means that your car loan, credit card and even your overdraft protection can be linked to your mortgage. This means that you have a risk of foreclosure for any other piece of debt held at that Financial Institution. Yes, you can be foreclosed on for missing your credit card payment.

2). The mortgage will be more costly to transfer at renewal if necessary. Typically a collateral mortgage charge will need to be discharged and reregistered should you decide to change lenders.

3).The renewal rates typically offered on collateral mortgages seem to be higher than they should be.

I often get questions from my clients asking if the Collateral Mortgage Charge is bad? The short answer is no. It is not bad. However, if your lender is registering the mortgage this way it is important that you understand how the mortgage charge works and understand that it will limit you in the future.

I usually recommend that if a mortgage has a collateral charge that the client ensure that they limit the amount of credit that they have at that lender. For example, Mr. and Mrs. Mortgage have their Mortgage, personal line of credit, car loan and two credit cards at BANK ABC. I make the recommendation, that they either move their mortgage to another lender or see if they can move some of their personal credit to another lender. There have been cases, where people have been put into foreclosure for some bad credit card debts. Unreasonable? Maybe. This scenario can even get more complex if the borrowers are self-employed and have their small business bank accounts with that collateral charge lender.

That’s why it is important that you always come to your friendly neighbourhood mortgage professional for any advice surrounding your mortgage. We will always put our client’s best interests FIRST and can usually save you $1000s of dollars in unnecessary interest and fees.

Peter Paley

The Dangers Of CMHC Getting Out Of The Refinance Business

General Peter Paley 10 Dec

The Dangers Of CMHC Getting Out Of The Refinance Business.

CMHC and the other mortgage default insurers have exited the refinance business under the premise it is going to protect the Canadian Tax Payer. Some thought this was a prudent measure, others thought it was bad policy. We have been monitoring the effects as clients and potential clients have been coming into our office and applying for mortgage refinances.

The new refinance rules are going to take effect on January 1st, 2018 which will subject anyone wanting to refinance their mortgage to qualify at a new stress test of either the Bank of Canada Qualifying rate or the contract rate + 2% (whichever is higher. I don’t want to debate the policy in this blog post. I do want to point out what I hope is an unintended consequence.
Single or one income households are going to be drastically affected. Not only are costs rising gas, hydro, water, property taxes etc, wages seem stagnant and reliance on credit cards and lines of credit are on the rise.

While this is bad enough and will probably force 100s, maybe 1000s of Canadian families to sell their home, the real victims are going to be people living in smaller homes under 900 square feet and people living in what we in the mortgage industry refer to a “RED ZONE”. A “RED ZONE” is typically a working-class neighbourhood that is plagued by high crime rates and various socioeconomic challenges.

Many lenders have put a moratorium on small houses in general and any homes located within their self-determined red zone. Winnipeg, in particular, has a large number of tiny houses 500 – 800 sqft located right across the city. From West Kildonan to St. Vital and from Transcona to Westwood, there are many homes that simply will not be financed by MANY, MANY major lenders. Winnipeg’s red zone as a general rule of thumb starts at Portage and Main, goes west along Portage Avenue, then turns north on Arlington Street and continues all the way out to Church Avenue, then goes all the east to Main and finally goes all the way back south and ends at Portage and Main. My point is there are going a lot of houses not eligible for refinancing. We are finding even the credit union system is starting to shy away from these properties.

Before the last set of rule changes, CMHC and the other insurers would offer bulk insurance to lenders and these properties would ultimately be insured against default. It was a win-win for the lender and the client. Now, that the insurers are prohibited from offering insurance for refinances, lenders are losing their appetites for these small/higher risk properties.

I just want to be very clear that a homebuyer CAN purchase and CAN mortgage one of these properties because default insurance IS available for these types of properties in a purchase situation. The challenge is now and will be what will be the policy for the people that are living in smaller homes and that have located in these red zones?

In my opinion, these homeowners are going to have to sell their homes and hope they are able to qualify for a new one with 5% – 15% down or refinance at a much higher rate with a lender who still has the appetite for such risk.

What will happen to the condition of these homes if the homeowner isn’t able to refinance to do maintenance and upgrades such as new roofs, foundation repairs, build a garage, replace the furnace or even the windows? What will happen to one-income-households that have a financial emergency or end up on a short or long-term disability?

We are already seeing files that are being declined due to this property bias and quite frankly, I find it very alarming.

I would like to ask that anyone who reads this reach out to their MP and even their MLA to draw their attention to this small home and red zone paradox. In my opinion, it is imperative that the mortgage default insurers immediately roll out a policy/product that is specifically designed for these “riskier” properties.

If you or anyone you know is looking to refinance their mortgage, please have them contact my office directly.

Peter Paley
Senior Mortgage Partner
DLC – Spooner Financial
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Homebuyer’s Seminar – November 22nd, 2018

General Peter Paley 31 Oct

If you have mortgage & real estate questions, we have the answers. Join us November 22nd for a very informative information session about your real estate and home financing options. Please follow the link to register. https://dominionlending.worldsecuresystems.com/first-time-home-buyers

Prudence Or Bad Policy? What Effect Will All The Mortgage Rules Have On Canadians?

General Peter Paley 20 Oct

Here we are again on the brink of more mortgage rule changes. Federal regime after federal regime has been tightening our mortgage rules for about 10 years. Granted, it is worth noting that previous mortgage qualification rules were arguably loosey-goosey and some prudent changes were necessary. Now they are becoming almost impossible and some may say elitist. I would like an opportunity to recap the rule changes over the last decade.
Prior to the first rule change:
– No down payment required – finance 100%
– Maximum amortization was 40 years.
– Refinance up to 95% the value of your home.
– With excellent credit scores 680+, you could have a Total Debt Service Ratio (TDSR) of
49%
– Minimum credit score for CMHC was 580.

Fall 2008:
– Reduction of maximum amortization from 40 years to 35 years.
– Introduction of a minimum score for Insured mortgages of 620 (But lower scores were
considered on an exception basis).
– 100% financing was eliminated. (However, you could still use a Cash Back Mortgage for
down payment).
– Maximum TDSR lowered to 45%.

Spring 2010:
– Stricter rental property guidelines. The amount of rent for income/debt servicing
purposes was reduced from 80% to 50%.
– A Mortgage Qualifying Rate was introduced for all insured mortgages on all variable
terms and all fixed rate mortgage terms 4 years and less. (5-year fixed rate mortgages
were still allowed to qualify at the contract rate).
– Rental Mortgage down payment minimum was raised from 10% to 20%.
– Insured refinances reduced from 95% Loan to Value to 90%.

Spring 2011:
– Insured Home Equity Lines of Credit discontinued.
– Insured refinances further reduced from 90% Loan to value to 85%
– Maximum amortizations lowered further from 35 years to 30 years.
Summer 2012:
– Implementation of a New Gross Debt Service Ratio maximum of 39%
– Refinance loan to value reduced further from 85% to 80%
– Maximum amortization reduced from 30 years to 25 years for insured mortgages.

Not bad for 4 years worth of work. Now the OSFI (Office of the Superintendent of Financial Institutions) changes begin with the B-20 and B-21 Legislation. This occurred between fall 2012 and spring 2013.

OSFI B20 – 2012-2013:
– A new maximum Loan to Value for Home Equity Lines of Credit of 65%, down from 80%.
– The Bank of Canada’s qualifying rate is now applied to all variable and fixed rate
mortgage terms of 4 years or less for conventional mortgages.
– Self-employed borrowers are mandated to provide reasonable income verification. Stated
Income Programs disappear.
– Cashback mortgages are no longer permitted to be used for down payment.

OSFI B21 – Winter 2014:
– Tighter regulations around how to calculate payments on Secured and Home Equity Secured
Lines of Credit.
– All revolving credit payments for debt servicing are now calculated at 3% of the
outstanding balance instead of the interest-only payments. For example, a $10,000 credit
card balance would now have a qualifying payment $300/month up from about $45/month.
Are you feeling a little mad, disappointed or discouraged yet? Now for the greed. For
the next part of this article, remember that default rates in Canada have almost always
been below 0.5%.

Summer 2015:
– Default Mortgage Insurers increase premiums. At a 90.1% – 95% Loan to Value the premium
increased from 3.15% to 3.6%. This cost to consumers would be an additional $1,350 of
default insurance on a $300,000 mortgage.

New Year 2016:
– Increase to the minimum down payments for mortgage amounts between $500,000 and
$999,999.

Fall 2016:
– Mortgage Insurance limited to purchase prices not exceeding $999,999
– Insured refinances were eliminated altogether.
– To avoid the abuse of capital gains exemptions, foreign property owners need to prove
that they are selling a primary residence.
– The mortgage stress test expands to 5-year term mortgages but excluded uninsured
conventional mortgages.

Happy New Year’s 2017:

– Insurers realized revenues are down from all the previous changes and increase premiums
AGAIN! With a 5% down payment, the mortgage insurance premium jumped from 3.6% to a
WHOPPING 4%. This means that you as a homeowner would have a mere 1% equity interest in
your home.

Fall 2017:
– It is announced that in January 2018 that all conventional mortgages will need to
qualify with their own stress test which will be the contract rate +2.0%. So that means
that if the 5-year fixed rate is 3.49%, you would have to qualify at a rate of 5.49%.

Now to get to the main issue. HOW IS THIS AFFECTING CANADIANS? These mortgage rule changes started out as a prudent measure to ensure that Canada wouldn’t fall victim to a US-style housing market crash. In the beginning, the changes made sense, and the markets and economy started to recover after 2007/2008. However, the changes kept coming and many would say that they snowballed out of control. We repeatedly kept hearing that Canadians’ Debt-to-Income ratios were out of control – 150%, 160%, and even 170% depending on who was talking and the criteria they used. So instead of limiting the real culprits of this phenomenon (Credit card companies and other unsecured lenders who charge up to 39.9% interest), the Canadian government took aim at home buyers, homeowners and the mortgage industry instead of the lending practices of these high-interest rate lenders. It is my opinion that the recent steps taken by OSFI and the Canadian Government are like “curing the disease by killing the patient”.
Let’s take a look at one of our clients, Jane. Jane purchased her home in 2013. She purchased a beautiful small home in one of Winnipeg’s up and coming neighbourhoods. She was an excellent, hardworking borrower with excellent credit. Now in 2017, she has a HUGE problem. She would like to refinance to do some upgrades and necessary repairs. Is she able to refinance her mortgage to accomplish her goals? NO. When the Canadian government/OSFI mandated that the insurers were no longer able to provide default insurance for refinances, this put people like Jane in a terrible spot. Unfortunately for her, the neighbourhood in which she lived was designated a “RED ZONE” by most lenders. This means that lenders would not lend in the neighbourhood without mortgage default Insurance. The lenders who would lend in the area, have implemented square footage minimums as high as 750sqft. In fact, Jane’s own bank who already holds the mortgage decided to decline her application based on these criteria alone. So, what is she to do? Take out a high interest and expensive 2nd mortgage? Sell her home? Or get a separate loan with high payments? We don’t really know the answers to these questions. However, we do know that bad policy is devastating the middle class.
What will happen to the thousands of other people that are in a similar situation? What is going to happen to the up and coming and gentrifying Canadian neighbourhoods? Will new policies be created to fill this very serious gap? Will the Canadian government admit to these alleged errors and that they may have gone too far? Will they take the steps to limit the predatory unsecured and credit card lending? Are these policies going to be the death of the Canadian homeownership dream? If Canadians are unable to look after their homes properly, are we headed to American style slums?
Only time will time will tell. I’m sure that if the government has gone too far that they will pay for it in the polls.
If you are seeking mortgage advice or require a 2nd opinion, please contact me.

First Time Home Buyer? Why Not Buy a Duplex?

General Peter Paley 1 Jul

One of the best-kept secrets in the mortgage industry is the Owner Occupied Rental Program.  Did you know, that anyone can buy and owner-occupied duplex, tri-plex or even a four-plex with only 5% down?  It’s true!  The best part is that many lenders will allow you to use 100% of the rent to help you pay/qualify for your mortgage.

With rental prices sky-rocketing across the country, this is a great way to get your first home and build equity fast.  As I write this I’m sitting in one of my rental properties hosting an open house in hope of renting it out ($16oo/month).   Rental properties an excellent way to build equity, earn income and gain your financial independence.

If you earn $50,000 per year (and have no debt), under the new mortgage qualification rules you would qualify for a purchase price of approximately $260,000 with 5% down payment.   However, if you consider and owner occupied duplex your situation changes dramatically.   You can now afford a duplex worth about $350,000.  We are assuming a rental income of approximately $1500/month.  This rental income would mean your adjusted mortgage payment would be under $200/month.

This is how I started building my own rental portfolio.

Please contact me for more information.

 

Open Houses – A great introduction to the housing market.

General Peter Paley 4 Jun

So, you want to buy a house?   You need information that is accurate and up-to-date.  Many first time home buyers start googling on the internet.  It is very easy to get confused and overwhelmed with the amount of information available.  Fixed rates, variable rates, CMHC, Genworth, 5% down, 20% down, insured, conventional, collateral charges…. and many many other terms.

After you contact your friendly neighbourhood mortgage professional. and get pre-qualified and understand the process.  Start by going to open houses in the local area.  Get a feel for what you like, what prices are and it is also a great way to interview REALTORs to see if you want them representing you.

If you see a property that you like you can send your mortgage professional the feature sheet and listing information and see how much the monthly payment would be, the rate you would qualify for and get all of your documents together for an official pre-approval.

The Truth About Mortgage Math

General Peter Paley 26 May

Are you tired of the mass media paranoia?  The Housing Bubble! Debt-to-income Ratios! Canada Is On The Verge Of Economic Collapse!  Foreign Investors!  The Stress Test!  The Liberals, The Conservatives, The NDP are destroying our country or province or something or other virtually every day.  It would seem that the sky is falling.

Take a deep breath.

Now, take another deep breath.

When I became a mortgage professional,  we were taught the basics and taught some simple facts.

  • The mortgage default rate in Canada is less than .3% (at the time of writing).
  • If mortgage interest rates double, your mortgage payments will increase by only 32-38% depending upon your amortization.
  • Every .25% increase or decrease to oyour mortgage rate will change your mortgage payment by only $0.13 /$1000 of mortgage/month.
  • The difference between a 25 year amortization and 30 year amortization is about $.054/$1000 of mortgage/month.

In my almost 20 years of the financial services industry, I have never seen as much negative press around our industry.  The clients that are coming into my office are very well prepared.  They have saved their down payments, have positive net worth, and EXCELLENT credit!

Do not be deterred by the negative media.  Contact your friendly neighborhood mortgage professional today!

Peter Paley

 

The New Frontier – Get involved and contact your MP.

General Peter Paley 21 May

Mortgages are simple.  They should be easy to acquire and should have a common-sense based application process.   However, over the last decade, there have been numerous changes.   The regulators have decreased our amortizations from 40 years to 35 to 30 and now 25 (for insured mortgages).  They have curtailed and obstructed small business owners, entrepreneurs, commissioned sales people and even part-time employees.  They have limited and restricted investors and landlords.  They have even obstructed first time home buyers by reducing the amounts of approved mortgages by adding a stress test.  They have even limited people from refinancing their houses to pay off debt or get out of tight financial situations by reducing refinance amounts from 95% to 90% and further to 80%.   They did all of this in the spirit of protecting the Canadian Tax Payer from a US style crash.  There has been over 10 years of fearmongering from national and local media outlets, politicians who have been elected seem to be clueless when it comes to matters of housing and mortgages.  The banks are greedier than ever when it comes to protecting profits and slamming the little guy with high penalties and rates.  The housing bubble, the foreign investors, debt to income ratios and all of the other blah, blah blah, seem to have been nothing but media hype.

Were all of the changes bad? No.  Did these changes eliminate most of the common sense from the mortgage adjudication process?  Yes.  The best part of my job as a Mortgage Professional is that I get to help people.   I help them buy their first home, repair bruised credit, help them a budget, downsize, improve cash flow, and introduce them to an amazing team of financial professionals.  However, it is getting harder and harder to help when the common sense is disappearing.

Our professional association is working with lenders and government to ensure that the first time home buyer and entrepreneur are protected and that mortgage approval criterion are fair and just for everyone.  Owning a home is the backbone of the Canadian dream and should be put within sights of every Canadian and not the most privileged.

We recommend contacting you MP and urge them to revisit mortgage qualification rules.   Please encourage them to reach out to our industry and let them know the importance that home ownership has for Canadian’s financial health.

The sky hasn’t fallen, the mass paranoia isn’t warranted in my opinion and it should be the job of our government to ensure there are plenty of jobs and growth and not to limit the average Canadian and over-regulate industry.

Peter Paley